Avanza Bank Holding AB (publ)'s (STO:AZA) Shares Lagging The Market But So Is The Business

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 22x, you may consider Avanza Bank Holding AB (publ) (STO:AZA) as an attractive investment with its 17.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Avanza Bank Holding has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Avanza Bank Holding

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

How Is Avanza Bank Holding's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Avanza Bank Holding's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. The latest three year period has also seen an excellent 86% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 0.2% as estimated by the nine analysts watching the company. That's shaping up to be materially lower than the 23% growth forecast for the broader market.

In light of this, it's understandable that Avanza Bank Holding's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Avanza Bank Holding's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Avanza Bank Holding maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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 1 warning sign with Avanza Bank Holding, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Avanza Bank Holding. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.