The Market Doesn't Like What It Sees From Profoto Holding AB (publ)'s (STO:PRFO) Earnings Yet As Shares Tumble 32%

The Profoto Holding AB (publ) (STO:PRFO) share price has fared very poorly over the last month, falling by a substantial 32%. For any long-term shareholders, the last month ends a year to forget by locking in a 64% share price decline.

Even after such a large drop in price, given about half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 22x, you may still consider Profoto Holding as a highly attractive investment with its 8.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Profoto Holding hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Profoto Holding

Want the full picture on analyst estimates for the company? Then our free report on Profoto Holding will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

Profoto Holding's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

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 19%. This means it has also seen a slide in earnings over the longer-term as EPS is down 20% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 13% over the next year. Meanwhile, the broader market is forecast to expand by 26%, which paints a poor picture.

In light of this, it's understandable that Profoto Holding's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Shares in Profoto Holding have plummeted and its P/E is now low enough to touch the ground. 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 Profoto Holding maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Profoto Holding (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.