Not Many Are Piling Into Spectra Systems Corporation (LON:SPSY) Stock Yet As It Plummets 26%

Unfortunately for some shareholders, the Spectra Systems Corporation (LON:SPSY) share price has dived 26% 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 42% share price drop.

Even after such a large drop in price, given about half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Spectra Systems as a highly attractive investment with its 7.1x 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 so limited.

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With earnings growth that's exceedingly strong of late, Spectra Systems has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

Check out our latest analysis for Spectra Systems

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Spectra Systems' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Spectra Systems would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 96% last year. The latest three year period has also seen an excellent 158% overall rise in EPS, aided by its short-term performance. 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 22% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Spectra Systems' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Spectra Systems' P/E

Having almost fallen off a cliff, Spectra Systems' share price has pulled its P/E way down as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Spectra Systems revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Spectra Systems (at least 1 which is concerning), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.