HEXPOL AB (publ)'s (STO:HPOL B) Low P/E No Reason For Excitement

HEXPOL AB (publ)'s (STO:HPOL B) price-to-earnings (or "P/E") ratio of 15.8x might make it look like a buy right now compared to the market in Sweden, where around half of the companies have P/E ratios above 24x and even P/E's above 44x 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 limited.

HEXPOL 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.

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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 HEXPOL's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.9% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 27% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 4.8% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

In light of this, it's understandable that HEXPOL'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 Key Takeaway

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 HEXPOL maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for HEXPOL with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on HEXPOL, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.