Step One Clothing Limited's (ASX:STP) 38% Dip In Price Shows Sentiment Is Matching Earnings

The Step One Clothing Limited (ASX:STP) share price has fared very poorly over the last month, falling by a substantial 38%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 80% loss during that time.

Even after such a large drop in price, Step One Clothing's price-to-earnings (or "P/E") ratio of 4.3x might still make it look like a strong buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 22x and even P/E's above 41x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Recent times haven't been advantageous for Step One Clothing as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

Check out our latest analysis for Step One Clothing

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Step One Clothing.

Does Growth Match The Low P/E?

Step One Clothing's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Looking ahead now, EPS is anticipated to slump, contracting by 10% per year during the coming three years according to the two analysts following the company. That's not great when the rest of the market is expected to grow by 18% each year.

With this information, we are not surprised that Step One Clothing is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Step One Clothing's P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Step One Clothing maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Before you settle on your opinion, we've discovered 4 warning signs for Step One Clothing (3 are a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of Step One Clothing's 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.