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

With a price-to-earnings (or "P/E") ratio of 12.4x AB Industrivärden (publ) (STO:INDU A) may be sending 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 39x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at AB Industrivärden over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

Check out 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.

Is There Any Growth For AB Industrivärden?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 42%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 27% shows it's noticeably less attractive on an annualised basis.

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 Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that AB Industrivärden maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

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

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.