Risks To Shareholder Returns Are Elevated At These Prices For Avanza Bank Holding AB (publ) (STO:AZA)

There wouldn't be many who think Avanza Bank Holding AB (publ)'s (STO:AZA) price-to-earnings (or "P/E") ratio of 22.4x is worth a mention when the median P/E in Sweden is similar at about 22x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

We've discovered 1 warning sign about Avanza Bank Holding. View them for free.

Recent times have been advantageous for Avanza Bank Holding as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

View our latest analysis for Avanza Bank Holding

Keen to find out how analysts think Avanza Bank Holding's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Avanza Bank Holding's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.6% per year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

In light of this, it's curious that Avanza Bank Holding's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Avanza Bank Holding's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Avanza Bank Holding's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Avanza Bank Holding is showing 1 warning sign in our investment analysis, you should know about.

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.

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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.