Investor Optimism Abounds Troax Group AB (publ) (STO:TROAX) But Growth Is Lacking

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 22x, you may consider Troax Group AB (publ) (STO:TROAX) as a stock to potentially avoid with its 33.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Troax Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Troax Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Troax Group.

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. As a result, earnings from three years ago have also fallen 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader market.

With this information, we find it concerning that Troax Group is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Troax Group 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's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Troax Group, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Troax Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.