Investors Still Waiting For A Pull Back In Mycronic AB (publ) (STO:MYCR)

With a price-to-earnings (or "P/E") ratio of 33.8x Mycronic AB (publ) (STO:MYCR) may be sending very bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 20x and even P/E's lower than 12x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Mycronic certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. The latest three year period has also seen an excellent 44% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 57% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

With this information, we can see why Mycronic is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Mycronic'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.

As we suspected, our examination of Mycronic's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Mycronic that you should be aware of.

If these risks are making you reconsider your opinion on Mycronic, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.