Some Zinzino AB (publ) (STO:ZZ B) Shareholders Look For Exit As Shares Take 31% Pounding

Zinzino AB (publ) (STO:ZZ B) shares have had a horrible month, losing 31% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 117%.

Although its price has dipped substantially, Zinzino's price-to-earnings (or "P/E") ratio of 30.8x might still 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 14x 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 as high as it is.

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Recent times have been advantageous for Zinzino as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Zinzino

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

Is There Enough Growth For Zinzino?

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

Retrospectively, the last year delivered a decent 6.4% gain to the company's bottom line. Pleasingly, EPS has also lifted 175% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 19% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 18% per annum, which is not materially different.

In light of this, it's curious that Zinzino's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Zinzino's P/E

There's still some solid strength behind Zinzino's P/E, if not its share price lately. 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 Zinzino currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zinzino, and understanding them should be part of your investment process.

If you're unsure about the strength of Zinzino'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.