Why Investors Shouldn't Be Surprised By Dedicare AB (publ)'s (STO:DEDI) 43% Share Price Plunge

Dedicare AB (publ) (STO:DEDI) shareholders that were waiting for something to happen have been dealt a blow with a 43% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

Although its price has dipped substantially, Dedicare's price-to-earnings (or "P/E") ratio of 5.6x might still 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 23x 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.

Dedicare hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Dedicare

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dedicare.

Is There Any Growth For Dedicare?

The only time you'd be truly comfortable seeing a P/E as depressed as Dedicare's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.2%. Even so, admirably EPS has lifted 126% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 5.5% per annum as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

In light of this, it's understandable that Dedicare'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.

The Bottom Line On Dedicare's P/E

Shares in Dedicare have plummeted and its P/E is now low enough to touch the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Dedicare's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Dedicare, and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.