Arjo AB (publ) (STO:ARJO B) Not Flying Under The Radar

There wouldn't be many who think Arjo AB (publ)'s (STO:ARJO B) price-to-earnings (or "P/E") ratio of 20.7x is worth a mention when the median P/E in Sweden is similar at about 23x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent earnings growth for Arjo has been in line with the market. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

See our latest analysis for Arjo

Keen to find out how analysts think Arjo's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Arjo's Growth Trending?

The only time you'd be comfortable seeing a P/E like Arjo's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 3.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 33% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the five analysts watching the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's understandable that Arjo's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Arjo's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Arjo maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Arjo, and understanding should be part of your investment process.

You might be able to find a better investment than Arjo. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.