Earnings Working Against Warpaint London PLC's (LON:W7L) Share Price Following 26% Dive

To the annoyance of some shareholders, Warpaint London PLC (LON:W7L) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 59% loss during that time.

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 Warpaint London as an attractive investment with its 10.9x 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 limited.

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While the market has experienced earnings growth lately, Warpaint London's 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.

Check out our latest analysis for Warpaint London

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

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Warpaint London's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. Even so, admirably EPS has lifted 175% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 5.5% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 15% per annum growth forecast for the broader market.

In light of this, it's understandable that Warpaint London's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The softening of Warpaint London's shares means its P/E is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Warpaint London's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Warpaint London, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Warpaint London, 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.