Why Investors Shouldn't Be Surprised By AB Industrivärden (publ)'s (STO:INDU A) Low P/E

AB Industrivärden (publ)'s (STO:INDU A) price-to-earnings (or "P/E") ratio of 4.8x 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 42x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

AB Industrivärden has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

See our latest analysis for AB Industrivärden

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AB Industrivärden will help you shine a light on its historical performance.

How Is AB Industrivärden's Growth Trending?

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

Retrospectively, the last year delivered a decent 4.0% gain to the company's bottom line. Pleasingly, EPS has also lifted 58% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 31% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

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

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of AB Industrivärden revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for AB Industrivärden that you should be aware of.

Of course, you might also be able to find a better stock than AB Industrivärden. 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.