Why Investors Shouldn't Be Surprised By 2 Cheap Cars Group Limited's (NZSE:2CC) 25% Share Price Plunge

2 Cheap Cars Group Limited (NZSE:2CC) shareholders that were waiting for something to happen have been dealt a blow with a 25% 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 36% share price drop.

In spite of the heavy fall in price, 2 Cheap Cars Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.7x, since almost half of all companies in New Zealand have P/E ratios greater than 20x and even P/E's higher than 30x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at 2 Cheap Cars Group 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.

Check out our latest analysis for 2 Cheap Cars Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on 2 Cheap Cars Group will help you shine a light on its historical performance.

Is There Any Growth For 2 Cheap Cars Group?

In order to justify its P/E ratio, 2 Cheap Cars Group would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 47%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 27% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that 2 Cheap Cars Group's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Shares in 2 Cheap Cars Group have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of 2 Cheap Cars Group 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for 2 Cheap Cars Group you should be aware of.

You might be able to find a better investment than 2 Cheap Cars Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.