Take Care Before Jumping Onto EZZ Life Science Holdings Limited (ASX:EZZ) Even Though It's 41% Cheaper
EZZ Life Science Holdings Limited (ASX:EZZ) shareholders that were waiting for something to happen have been dealt a blow with a 41% 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 44% share price drop.
Although its price has dipped substantially, EZZ Life Science Holdings' price-to-earnings (or "P/E") ratio of 10.3x might still make it look like a strong buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 22x and even P/E's above 39x 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.
While the market has experienced earnings growth lately, EZZ Life Science Holdings' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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 EZZ Life Science Holdings
How Is EZZ Life Science Holdings' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as EZZ Life Science Holdings' is when the company's growth is on track to lag the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 9.8%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 362% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 38% over the next year. That's shaping up to be materially higher than the 23% growth forecast for the broader market.
In light of this, it's peculiar that EZZ Life Science Holdings' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On EZZ Life Science Holdings' P/E
Having almost fallen off a cliff, EZZ Life Science Holdings' share price has pulled its P/E way down as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of EZZ Life Science Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with EZZ Life Science Holdings (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.