Investor Optimism Abounds Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) But Growth Is Lacking

Svenska Cellulosa Aktiebolaget SCA (publ)'s (STO:SCA B) price-to-earnings (or "P/E") ratio of 26.1x might make it look like a sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 22x and even P/E's below 12x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Svenska Cellulosa Aktiebolaget hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Svenska Cellulosa Aktiebolaget's Growth Trending?

In order to justify its P/E ratio, Svenska Cellulosa Aktiebolaget would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. This means it has also seen a slide in earnings over the longer-term as EPS is down 69% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader market.

With this information, we find it concerning that Svenska Cellulosa Aktiebolaget is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Svenska Cellulosa Aktiebolaget's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Svenska Cellulosa Aktiebolaget that you need to take into consideration.

Of course, you might also be able to find a better stock than Svenska Cellulosa Aktiebolaget. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.