Unpleasant Surprises Could Be In Store For Svenska Cellulosa Aktiebolaget SCA (publ)'s (STO:SCA B) Shares

With a price-to-earnings (or "P/E") ratio of 26.9x Svenska Cellulosa Aktiebolaget SCA (publ) (STO:SCA B) may be sending bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 22x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Svenska Cellulosa Aktiebolaget

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

What Are Growth Metrics Telling Us About The High P/E?

Svenska Cellulosa Aktiebolaget's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 9.5% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 23% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 22% per annum, which is noticeably more attractive.

In light of this, it's alarming that Svenska Cellulosa Aktiebolaget's P/E sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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.

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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Svenska Cellulosa Aktiebolaget that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.