The Market Doesn't Like What It Sees From Sleep Cycle AB (publ)'s (STO:SLEEP) Earnings Yet As Shares Tumble 34%

Sleep Cycle AB (publ) (STO:SLEEP) shares have had a horrible month, losing 34% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 10.0% in the last year.

In spite of the heavy fall in price, given about half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 22x, you may still consider Sleep Cycle as a highly attractive investment with its 9.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Sleep Cycle

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

Is There Any Growth For Sleep Cycle?

Sleep Cycle's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 33% last year. Pleasingly, EPS has also lifted 320% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 7.4% per annum over the next three years. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Sleep Cycle's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Sleep Cycle's P/E?

Having almost fallen off a cliff, Sleep Cycle's share price has pulled its P/E way down as well. 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.

As we suspected, our examination of Sleep Cycle's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You always need to take note of risks, for example - Sleep Cycle has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Sleep Cycle. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.