Investors Aren't Buying Tehnika D.d's (ZGSE:THNK) Earnings

Tehnika D.d's (ZGSE:THNK) price-to-earnings (or "P/E") ratio of 4.2x might make it look like a strong buy right now compared to the market in Croatia, where around half of the companies have P/E ratios above 15x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

As an illustration, earnings have deteriorated at Tehnika D.d over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

See our latest analysis for Tehnika D.d

Although there are no analyst estimates available for Tehnika D.d, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Tehnika D.d'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.

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 24%. The last three years don't look nice either as the company has shrunk EPS by 92% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to decline by 0.2% over the next year, or less than the company's recent medium-term annualised earnings decline.

With this information, it's not too hard to see why Tehnika D.d is trading at a lower P/E in comparison. However, when earnings shrink rapidly P/E often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent earnings trends are already weighing down the shares heavily.

The Key Takeaway

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 Tehnika D.d maintains its low P/E on the weakness of its recent three-year earnings being even worse than the forecasts for a struggling market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

You should always think about risks. Case in point, we've spotted 5 warning signs for Tehnika D.d you should be aware of, and 3 of them shouldn't be ignored.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.