Sleep Cycle AB (publ) (STO:SLEEP) Held Back By Insufficient Growth Even After Shares Climb 30%

Sleep Cycle AB (publ) (STO:SLEEP) shares have had a really impressive month, gaining 30% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.7% in the last twelve months.

In spite of the firm bounce in price, Sleep Cycle's price-to-earnings (or "P/E") ratio of 12.6x 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 24x and even P/E's above 38x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's superior to most other companies of late, Sleep Cycle 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Sleep Cycle

Want the full picture on analyst estimates for the company? Then our free report on Sleep Cycle will help you uncover what's on the horizon.

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

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

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 76% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.4% per annum during the coming three years according to the dual analysts following the company. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.

With this information, we can see why Sleep Cycle is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Despite Sleep Cycle's shares building up a head of steam, its P/E still lags most other companies. 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 Sleep Cycle maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Sleep Cycle (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.