Lacklustre Performance Is Driving Recreate ASA's (OB:RCR) 28% Price Drop

Recreate ASA (OB:RCR) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 35% share price drop.

Since its price has dipped substantially, Recreate may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.6x, since almost half of all companies in Norway have P/E ratios greater than 12x and even P/E's higher than 21x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Recreate's financial performance has been poor lately as it's 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. 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 Recreate

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 Recreate's earnings, revenue and cash flow.

How Is Recreate's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 30%. The last three years don't look nice either as the company has shrunk EPS by 94% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 33% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Recreate is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Recreate's P/E has taken a tumble along with its share price. 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 Recreate revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Recreate (of which 2 are a bit unpleasant!) you should know about.

Of course, you might also be able to find a better stock than Recreate. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.