Why Investors Shouldn't Be Surprised By Polygiene Group AB's (STO:POLYG) Low P/E

With a price-to-earnings (or "P/E") ratio of 9x Polygiene Group AB (STO:POLYG) may be sending bullish signals at the moment, given that almost half of all companies in Sweden have P/E ratios greater than 17x and even P/E's higher than 31x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Polygiene Group has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for Polygiene Group

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

How Is Polygiene Group's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Polygiene Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 190% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 2.3% per annum during the coming three years according to the lone analyst following the company. Meanwhile, the broader market is forecast to expand by 18% each year, which paints a poor picture.

With this information, we are not surprised that Polygiene Group is trading at a P/E lower than the market. 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.

What We Can Learn From Polygiene Group's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Polygiene Group's analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Polygiene Group that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.