Take Care Before Jumping Onto Orchard Funding Group plc (LON:ORCH) Even Though It's 38% Cheaper

Orchard Funding Group plc (LON:ORCH) shareholders that were waiting for something to happen have been dealt a blow with a 38% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 48% in that time.

After such a large drop in price, Orchard Funding Group may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.9x, since almost half of all companies in the United Kingdom have P/E ratios greater than 15x and even P/E's higher than 29x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Earnings have risen firmly for Orchard Funding Group recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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 Orchard Funding Group

Although there are no analyst estimates available for Orchard Funding Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Orchard Funding Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Orchard Funding Group's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. This was backed up an excellent period prior to see EPS up by 35% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's about the same on an annualised basis.

In light of this, it's peculiar that Orchard Funding Group's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Bottom Line On Orchard Funding Group's P/E

Having almost fallen off a cliff, Orchard Funding Group's share price has pulled its P/E way down as well. 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.

Our examination of Orchard Funding Group revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

Plus, you should also learn about these 6 warning signs we've spotted with Orchard Funding Group (including 4 which are a bit concerning).

If these risks are making you reconsider your opinion on Orchard Funding Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.