Benign Growth For Close the Loop Ltd (ASX:CLG) Underpins Stock's 28% Plummet

Unfortunately for some shareholders, the Close the Loop Ltd (ASX:CLG) share price has dived 28% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

After such a large drop in price, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Close the Loop as an attractive investment with its 10.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Close the Loop could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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.

See our latest analysis for Close the Loop

Want the full picture on analyst estimates for the company? Then our free report on Close the Loop will help you uncover what's on the horizon.

How Is Close the Loop's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 57% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 15% each year during the coming three years according to the two analysts following the company. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.

In light of this, it's understandable that Close the Loop'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

Close the Loop's recently weak share price has pulled its P/E below most other companies. 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 Close the Loop maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Close the Loop is showing 3 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Close the Loop. 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.