Sentiment Still Eluding Transferator AB (publ) (NGM:TRAN A)

Transferator AB (publ)'s (NGM:TRAN A) price-to-earnings (or "P/E") ratio of 5.7x might make it look like a strong buy right now compared to the market in Sweden, where around half of the companies have P/E ratios above 24x and even P/E's above 44x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Transferator certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, 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?

The only time you'd be truly comfortable seeing a P/E as depressed as Transferator's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. The strong recent performance means it was also able to grow EPS by 223% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 28% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Transferator is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

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.

We've established that Transferator currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Transferator (at least 2 which are significant), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Transferator, 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.