Trelleborg AB (publ) (STO:TREL B) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 27.3x Trelleborg AB (publ) (STO:TREL B) may be sending bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 23x and even P/E's lower than 15x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Trelleborg has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Trelleborg

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Trelleborg's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 51% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 11% per annum over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Trelleborg is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Trelleborg currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Trelleborg that you need to take into consideration.

You might be able to find a better investment than Trelleborg. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com