NTAW Holdings Limited's (ASX:NTD) 43% Share Price Plunge Could Signal Some Risk

The NTAW Holdings Limited (ASX:NTD) share price has fared very poorly over the last month, falling by a substantial 43%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 71% loss during that time.

In spite of the heavy fall in price, given around half the companies in Australia have price-to-earnings ratios (or "P/E's") below 20x, you may still consider NTAW Holdings as a stock to potentially avoid with its 24.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, NTAW Holdings' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for NTAW Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on NTAW Holdings' earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as NTAW Holdings' is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. As a result, earnings from three years ago have also fallen 95% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that NTAW Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On NTAW Holdings' P/E

Despite the recent share price weakness, NTAW Holdings' P/E remains higher than most other companies. 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.

We've established that NTAW Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 7 warning signs for NTAW Holdings you should be aware of, and 2 of them make us uncomfortable.

If you're unsure about the strength of NTAW Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.