Investors Don't See Light At End Of Crocs, Inc.'s (NASDAQ:CROX) Tunnel And Push Stock Down 25%

Crocs, Inc. (NASDAQ:CROX) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 27%, which is great even in a bull market.

In spite of the heavy fall in price, Crocs' price-to-earnings (or "P/E") ratio of 7.1x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 36x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Crocs certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Crocs

Want the full picture on analyst estimates for the company? Then our free report on Crocs will help you uncover what's on the horizon.

How Is Crocs' Growth Trending?

Crocs' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. EPS has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 4.3% per year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

In light of this, it's understandable that Crocs' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Shares in Crocs have plummeted and its P/E is now low enough to touch the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Crocs maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Crocs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're unsure about the strength of Crocs' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.