Lagercrantz Group AB (publ)'s (STO:LAGR B) Price Is Out Of Tune With Earnings

Lagercrantz Group AB (publ)'s (STO:LAGR B) price-to-earnings (or "P/E") ratio of 38.7x might make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 21x and even P/E's below 13x 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 so lofty.

Lagercrantz Group certainly has been doing a good job lately as it's been growing earnings more 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.

Check out our latest analysis for Lagercrantz Group

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Lagercrantz Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. The latest three year period has also seen an excellent 131% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 13% per annum over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Lagercrantz Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Lagercrantz Group's P/E

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 Lagercrantz Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Lagercrantz Group is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Lagercrantz Group'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.