What AAK AB (publ.)'s (STO:AAK) P/E Is Not Telling You

AAK AB (publ.)'s (STO:AAK) price-to-earnings (or "P/E") ratio of 28.6x might make it look like a sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 21x and even P/E's below 13x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

AAK AB (publ.) certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AAK AB (publ.)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on AAK AB (publ.).

How Is AAK AB (publ.)'s Growth Trending?

In order to justify its P/E ratio, AAK AB (publ.) would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.5% last year. The latest three year period has also seen an excellent 38% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 7.2% each year over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

With this information, we find it concerning that AAK AB (publ.) is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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 AAK AB (publ.) currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

Of course, you might also be able to find a better stock than AAK AB (publ.). So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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