Earnings Working Against Atara Biotherapeutics, Inc.'s (NASDAQ:ATRA) Share Price Following 32% Dive

To the annoyance of some shareholders, Atara Biotherapeutics, Inc. (NASDAQ:ATRA) shares are down a considerable 32% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 60% loss during that time.

Since its price has dipped substantially, Atara Biotherapeutics may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of -0.9x, since almost half of all companies in the United States have P/E ratios greater than 15x 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.

With earnings growth that's superior to most other companies of late, Atara Biotherapeutics has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Atara Biotherapeutics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Atara Biotherapeutics.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 43%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 2.8% each year during the coming three years according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 11% per annum.

In light of this, it's understandable that Atara Biotherapeutics' 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.

What We Can Learn From Atara Biotherapeutics' P/E?

Having almost fallen off a cliff, Atara Biotherapeutics' share price has pulled its P/E way down as well. 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 Atara Biotherapeutics 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.

You need to take note of risks, for example - Atara Biotherapeutics has 5 warning signs (and 1 which is a bit concerning) we think you should know about.

You might be able to find a better investment than Atara Biotherapeutics. 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.