FDM Group (Holdings) plc (LON:FDM) Looks Inexpensive After Falling 42% But Perhaps Not Attractive Enough

FDM Group (Holdings) plc (LON:FDM) shareholders that were waiting for something to happen have been dealt a blow with a 42% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 71% share price decline.

Since 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 consider FDM Group (Holdings) as a highly attractive investment with its 6.6x 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.

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While the market has experienced earnings growth lately, FDM Group (Holdings)'s earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for FDM Group (Holdings)

Keen to find out how analysts think FDM Group (Holdings)'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?

FDM Group (Holdings)'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 50%. The last three years don't look nice either as the company has shrunk EPS by 36% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 7.4% per year over the next three years. That's not great when the rest of the market is expected to grow by 15% each year.

In light of this, it's understandable that FDM Group (Holdings)'s P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From FDM Group (Holdings)'s P/E?

FDM Group (Holdings)'s P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of FDM Group (Holdings)'s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware FDM Group (Holdings) is showing 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If you're unsure about the strength of FDM Group (Holdings)'s 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.