Why Investors Shouldn't Be Surprised By CTR Holdings Limited's (HKG:1416) 30% Share Price Plunge

CTR Holdings Limited (HKG:1416) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 8.9% in the last year.

Even after such a large drop in price, CTR Holdings' price-to-earnings (or "P/E") ratio of 4.6x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 19x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For example, consider that CTR Holdings' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for CTR Holdings

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 CTR Holdings' earnings, revenue and cash flow.

How Is CTR Holdings' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why CTR Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From CTR Holdings' P/E?

Having almost fallen off a cliff, CTR Holdings' share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that CTR Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for CTR Holdings (2 are concerning) you should be aware of.

Of course, you might also be able to find a better stock than CTR Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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