Earnings Working Against Havila Kystruten AS' (OB:HKY) Share Price Following 51% Dive

To the annoyance of some shareholders, Havila Kystruten AS (OB:HKY) shares are down a considerable 51% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 79% share price decline.

Even after such a large drop in price, given about half the companies in Norway have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Havila Kystruten as a highly attractive investment with its -0.5x P/E ratio. 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 Havila Kystruten 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Havila Kystruten

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

How Is Havila Kystruten's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Havila Kystruten's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 244% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 32% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Havila Kystruten 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.

The Final Word

Shares in Havila Kystruten have plummeted and its P/E is now low enough to touch the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Havila Kystruten revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Havila Kystruten (3 are a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Havila Kystruten, 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.