Improved Earnings Required Before Rugvista Group AB (publ) (STO:RUG) Stock's 26% Jump Looks Justified

Rugvista Group AB (publ) (STO:RUG) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the last month did very little to improve the 70% share price decline over the last year.

In spite of the firm bounce in price, Rugvista Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.2x, since almost half of all companies in Sweden have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Rugvista Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Rugvista Group.

Is There Any Growth For Rugvista Group?

In order to justify its P/E ratio, Rugvista Group would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 76% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 25% over the next year. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.

In light of this, it's understandable that Rugvista Group'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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Despite Rugvista Group's shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Rugvista Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Rugvista Group (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Rugvista Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.