HEXPOL AB (publ)'s (STO:HPOL B) Earnings Are Not Doing Enough For Some Investors

HEXPOL AB (publ)'s (STO:HPOL B) price-to-earnings (or "P/E") ratio of 15.5x might 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 23x and even P/E's above 35x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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HEXPOL could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 HEXPOL

Keen to find out how analysts think HEXPOL's future stacks up against the industry? In that case, our free report is a great place to start.

How Is HEXPOL's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as HEXPOL's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. The last three years don't look nice either as the company has shrunk EPS by 15% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 13% over the next year. Meanwhile, the rest of the market is forecast to expand by 29%, which is noticeably more attractive.

In light of this, it's understandable that HEXPOL's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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 HEXPOL'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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for HEXPOL with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.