Cheffelo AB (publ)'s (STO:CHEF) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Cheffelo AB (publ) (STO:CHEF) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 163% in the last year.

Even after such a large jump in price, Cheffelo may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20x, since almost half of all companies in Sweden have P/E ratios greater than 23x and even P/E's higher than 38x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Recent times have been advantageous for Cheffelo as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Cheffelo

Keen to find out how analysts think Cheffelo'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 Low P/E?

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

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 8.5% each year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 18% per year growth forecast for the broader market.

In light of this, it's understandable that Cheffelo's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Cheffelo's P/E?

Cheffelo's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Cheffelo maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Cheffelo that you should be aware of.

If you're unsure about the strength of Cheffelo'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.