Investors Give X2M Connect Limited (ASX:X2M) Shares A 27% Hiding

To the annoyance of some shareholders, X2M Connect Limited (ASX:X2M) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

Following the heavy fall in price, X2M Connect's price-to-earnings (or "P/E") ratio of -1.7x might 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 17x and even P/E's above 32x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been advantageous for X2M Connect as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for X2M Connect

If you'd like to see what analysts are forecasting going forward, you should check out our free report on X2M Connect.

How Is X2M Connect's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as X2M Connect's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 35% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 14% growth forecast for the broader market.

With this information, we find it odd that X2M Connect is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Shares in X2M Connect have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of X2M Connect's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 4 warning signs for X2M Connect (2 are concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on X2M Connect, 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.