Market Cool On CAB Payments Holdings Limited's (LON:CABP) Earnings Pushing Shares 26% Lower

The CAB Payments Holdings Limited (LON:CABP) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may still consider CAB Payments Holdings as an attractive investment with its 13.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, CAB Payments Holdings' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

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Does Growth Match The Low P/E?

CAB Payments Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. 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.

Looking ahead now, EPS is anticipated to climb by 37% per annum during the coming three years according to the three analysts following the company. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that CAB Payments Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

The softening of CAB Payments Holdings' shares means its P/E is now sitting at a pretty low level. 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 CAB Payments Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for CAB Payments Holdings that you should be aware of.

If you're unsure about the strength of CAB Payments Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com