Why We're Not Concerned Yet About I-Tech AB's (STO:ITECH) 25% Share Price Plunge

Unfortunately for some shareholders, the I-Tech AB (STO:ITECH) share price has dived 25% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 47% in the last year.

In spite of the heavy fall in price, there still wouldn't be many who think I-Tech's 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. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, I-Tech has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for I-Tech

Want the full picture on analyst estimates for the company? Then our free report on I-Tech will help you uncover what's on the horizon.

How Is I-Tech's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Pleasingly, EPS has also lifted 777% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 28% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 28%, which is not materially different.

With this information, we can see why I-Tech is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Following I-Tech's share price tumble, its P/E is now hanging on to the median market P/E. 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 I-Tech's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. 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 2 warning signs with I-Tech, and understanding these should be part of your investment process.

You might be able to find a better investment than I-Tech. 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.