Investors Don't See Light At End Of iHuman Inc.'s (NYSE:IH) Tunnel And Push Stock Down 38%

iHuman Inc. (NYSE:IH) shares have retraced a considerable 38% in the last month, reversing a fair amount of their solid recent performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.5% over the last twelve months.

Even after such a large drop in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider iHuman as a highly attractive investment with its 7.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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For example, consider that iHuman's financial performance has been poor lately as its 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.

View our latest analysis for iHuman

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 iHuman's earnings, revenue and cash flow.

How Is iHuman's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that iHuman's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Shares in iHuman 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 iHuman maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for iHuman that you should be aware of.

If these risks are making you reconsider your opinion on iHuman, 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.