Hexagon AB (publ)'s (STO:HEXA B) Business Is Yet to Catch Up With Its Share Price

With a median price-to-earnings (or "P/E") ratio of close to 23x in Sweden, you could be forgiven for feeling indifferent about Hexagon AB (publ)'s (STO:HEXA B) P/E ratio of 24.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Hexagon certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Hexagon

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

The only time you'd be comfortable seeing a P/E like Hexagon's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. The latest three year period has also seen a 12% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is noticeably more attractive.

With this information, we find it interesting that Hexagon is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hexagon currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Hexagon with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Hexagon. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.