There's No Escaping Nordic Paper Holding AB (publ)'s (STO:NPAPER) Muted Earnings Despite A 31% Share Price Rise

Despite an already strong run, Nordic Paper Holding AB (publ) (STO:NPAPER) shares have been powering on, with a gain of 31% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Although its price has surged higher, Nordic Paper Holding's price-to-earnings (or "P/E") ratio of 4.9x 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 18x and even P/E's above 33x 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.

With earnings growth that's superior to most other companies of late, Nordic Paper Holding has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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How Is Nordic Paper Holding's Growth Trending?

Nordic Paper Holding's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 293% gain to the company's bottom line. The latest three year period has also seen an excellent 37% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 16% during the coming year according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 11%, which paints a poor picture.

In light of this, it's understandable that Nordic Paper Holding's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Even after such a strong price move, Nordic Paper Holding's P/E still trails the rest of the market significantly. 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 Nordic Paper Holding maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Nordic Paper Holding (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Nordic Paper Holding, 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.