Benign Growth For Evolution AB (publ) (STO:EVO) Underpins Its Share Price

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 24x, you may consider Evolution AB (publ) (STO:EVO) as an attractive investment with its 15.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Evolution has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Evolution would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 15% gain to the company's bottom line. The latest three year period has also seen an excellent 125% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 8.2% as estimated by the analysts watching the company. With the market predicted to deliver 31% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Evolution's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Evolution's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Evolution's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Evolution with six simple checks will allow you to discover any risks that could be an issue.

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

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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.