Some Shareholders Feeling Restless Over CDL Investments New Zealand Limited's (NZSE:CDI) P/E Ratio

CDL Investments New Zealand Limited's (NZSE:CDI) price-to-earnings (or "P/E") ratio of 17.5x might make it look like a sell right now compared to the market in New Zealand, where around half of the companies have P/E ratios below 15x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that CDL Investments New Zealand's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for CDL Investments New Zealand

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 CDL Investments New Zealand's earnings, revenue and cash flow.

How Is CDL Investments New Zealand's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as CDL Investments New Zealand's is when the company's growth is on track to outshine 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 60%. This means it has also seen a slide in earnings over the longer-term as EPS is down 61% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.4% shows it's an unpleasant look.

With this information, we find it concerning that CDL Investments New Zealand is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On CDL Investments New Zealand's P/E

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.

We've established that CDL Investments New Zealand currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with CDL Investments New Zealand (including 1 which is potentially serious).

If these risks are making you reconsider your opinion on CDL Investments New Zealand, 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.