SThree plc's (LON:STEM) 25% Dip In Price Shows Sentiment Is Matching Earnings

Unfortunately for some shareholders, the SThree plc (LON:STEM) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.

Following the heavy fall in price, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider SThree as a highly attractive investment with its 6.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for SThree as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for SThree

Keen to find out how analysts think SThree's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

SThree'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.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. The latest three year period has also seen an excellent 90% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 10% per annum over the next three years. That's not great when the rest of the market is expected to grow by 14% each year.

With this information, we are not surprised that SThree is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On SThree's P/E

SThree's P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that SThree maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for SThree (of which 1 is significant!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.