Even With A 29% Surge, Cautious Investors Are Not Rewarding Avensia AB (publ)'s (STO:AVEN) Performance Completely

Avensia AB (publ) (STO:AVEN) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 42%.

Even after such a large jump in price, Avensia's price-to-earnings (or "P/E") ratio of 18.4x might still make it look like a buy right now compared to the market in Sweden, where around half of the companies have P/E ratios above 23x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Avensia. View them for free.

With earnings growth that's superior to most other companies of late, Avensia 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Avensia

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 302%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 28% per year during the coming three years according to the one analyst following the company. With the market only predicted to deliver 20% per year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Avensia is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Avensia's P/E

Avensia's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Avensia currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Avensia.

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.