Earnings Working Against AB Industrivärden (publ)'s (STO:INDU A) Share Price

With a price-to-earnings (or "P/E") ratio of 5.1x AB Industrivärden (publ) (STO:INDU A) may be sending very bullish signals at the moment, given that almost half of all companies in Sweden have P/E ratios greater than 24x and even P/E's higher than 42x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

AB Industrivärden 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.

Check out our latest analysis for AB Industrivärden

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on AB Industrivärden's earnings, revenue and cash flow.

Is There Any Growth For AB Industrivärden?

The only time you'd be truly comfortable seeing a P/E as depressed as AB Industrivärden'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 79%. Still, incredibly EPS has fallen 30% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 27% shows it's an unpleasant look.

In light of this, it's understandable that AB Industrivärden's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On AB Industrivärden'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.

As we suspected, our examination of AB Industrivärden revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for AB Industrivärden that we have uncovered.

If you're unsure about the strength of AB Industrivärden's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.