More Unpleasant Surprises Could Be In Store For Uniserve Communications Corporation's (CVE:USS) Shares After Tumbling 27%

To the annoyance of some shareholders, Uniserve Communications Corporation (CVE:USS) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 76% share price decline.

In spite of the heavy fall in price, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 10x, you may still consider Uniserve Communications as a stock to potentially avoid with its 13.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

For example, consider that Uniserve Communications' financial performance has been poor lately as it's earnings have been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Uniserve Communications

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 Uniserve Communications' earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Uniserve Communications would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 63%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 8.1% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Uniserve Communications' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Uniserve Communications' P/E

There's still some solid strength behind Uniserve Communications' P/E, if not its share price lately. 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.

Our examination of Uniserve Communications revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Uniserve Communications (1 can't be ignored) 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 P/E ratio below 20x).

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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.