Evertz Technologies Limited's (TSE:ET) Share Price Not Quite Adding Up

There wouldn't be many who think Evertz Technologies Limited's (TSE:ET) price-to-earnings (or "P/E") ratio of 14.3x is worth a mention when the median P/E in Canada is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Evertz Technologies hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Is There Some Growth For Evertz Technologies?

There's an inherent assumption that a company should be matching the market for P/E ratios like Evertz Technologies' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 2.9% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company are not good at all, suggesting earnings should decline by 33% over the next year. Meanwhile, the broader market is forecast to moderate by 9.2%, which indicates the company should perform poorly indeed.

With this information, it's perhaps strange that Evertz Technologies is trading at a fairly similar P/E in comparison. When earnings shrink rapidly the P/E often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Key Takeaway

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 Evertz Technologies currently trades on a higher than expected P/E since its earnings forecast is even worse than the struggling market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. In addition, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. Unless the company's prospects improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Evertz Technologies, and understanding should be part of your investment process.

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 P/E ratio 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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