Risks Still Elevated At These Prices As Carbon Studio S.A. (WSE:CRB) Shares Dive 28%

Carbon Studio S.A. (WSE:CRB) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 54% loss during that time.

Even after such a large drop in price, given close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may still consider Carbon Studio as a stock to avoid entirely with its 61x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Carbon Studio's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Carbon Studio

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 Carbon Studio's earnings, revenue and cash flow.

Is There Enough Growth For Carbon Studio?

In order to justify its P/E ratio, Carbon Studio would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 86% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 17% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Carbon Studio's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

A significant share price dive has done very little to deflate Carbon Studio's very lofty 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.

Our examination of Carbon Studio revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 7 warning signs for Carbon Studio (4 shouldn't be ignored!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com