Close the Loop Ltd (ASX:CLG) Held Back By Insufficient Growth Even After Shares Climb 40%

Close the Loop Ltd (ASX:CLG) shareholders are no doubt pleased to see that the share price has bounced 40% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Although its price has surged higher, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may still consider Close the Loop as an attractive investment with its 11.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Close the Loop hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

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

In order to justify its P/E ratio, Close the Loop would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 36%. This means it has also seen a slide in earnings over the longer-term as EPS is down 57% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

In light of this, it's understandable that Close the Loop's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Close the Loop's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Close the Loop's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Close the Loop, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Close the Loop, 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.