It's not a stretch to say that Corporate Travel Management Limited's (ASX:CTD) price-to-earnings (or "P/E") ratio of 16x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Corporate Travel Management could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.free report on Corporate Travel Management will help you uncover what's on the horizon.
How Is Corporate Travel Management's Growth Trending?
The only time you'd be comfortable seeing a P/E like Corporate Travel Management's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 56% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 11% each year during the coming three years according to the nine analysts following the company. That's not great when the rest of the market is expected to grow by 13% each year.
With this information, we find it concerning that Corporate Travel Management is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.
The Final Word
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Corporate Travel Management's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware Corporate Travel Management is showing 2 warning signs in our investment analysis, you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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This article by Simply Wall St is general in nature. 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.
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