The Market Doesn't Like What It Sees From TMM Real Estate Development Plc's (FRA:TR61) Earnings Yet As Shares Tumble 30%

TMM Real Estate Development Plc (FRA:TR61) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 367% in the last year.

After such a large drop in price, given close to half the companies in Germany have price-to-earnings ratios (or "P/E's") above 17x, you may consider TMM Real Estate Development as a highly attractive investment with its 3.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For example, consider that TMM Real Estate Development's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for TMM Real Estate Development

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 TMM Real Estate Development's earnings, revenue and cash flow.

Is There Any Growth For TMM Real Estate Development?

TMM Real Estate Development'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.

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. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 4.9% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that TMM Real Estate Development's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

TMM Real Estate Development's P/E looks about as weak as its stock price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that TMM Real Estate Development maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for TMM Real Estate Development you should be aware of, and 2 of them can't be ignored.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E 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.