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

There wouldn't be many who think Trelleborg AB (publ)'s (STO:TREL B) price-to-earnings (or "P/E") ratio of 23.2x is worth a mention when the median P/E in Sweden is similar at about 24x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Trelleborg certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Is There Some Growth For Trelleborg?

There's an inherent assumption that a company should be matching the market for P/E ratios like Trelleborg's to be considered reasonable.

Retrospectively, the last year delivered a decent 9.0% gain to the company's bottom line. The latest three year period has also seen an excellent 59% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.4% per year as estimated by the six analysts watching the company. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Trelleborg is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Trelleborg's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.