NTG Clarity Networks Inc. (CVE:NCI) Looks Inexpensive After Falling 30% But Perhaps Not Attractive Enough

To the annoyance of some shareholders, NTG Clarity Networks Inc. (CVE:NCI) shares are down a considerable 30% in the last month, which continues a horrid run for the company. Longer-term, the stock has been solid despite a difficult 30 days, gaining 14% in the last year.

Following the heavy fall in price, NTG Clarity Networks' price-to-earnings (or "P/E") ratio of 7.6x might make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 16x and even P/E's above 28x 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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NTG Clarity Networks certainly has been doing a good job lately as it's been growing earnings more 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.

See our latest analysis for NTG Clarity Networks

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Is There Any Growth For NTG Clarity Networks?

In order to justify its P/E ratio, NTG Clarity Networks would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. The strong recent performance means it was also able to grow EPS by 252% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 15% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 23%, which is noticeably more attractive.

In light of this, it's understandable that NTG Clarity Networks' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From NTG Clarity Networks' P/E?

Shares in NTG Clarity Networks have plummeted and its P/E is now low enough to touch the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that NTG Clarity Networks maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 2 warning signs for NTG Clarity Networks (1 is potentially serious!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.