Cautious Investors Not Rewarding Creative Newtech Limited's (NSE:CNL) Performance Completely
When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may consider Creative Newtech Limited (NSE:CNL) as an attractive investment with its 22.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at Creative Newtech over the last year, which is not ideal at all. 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.
See our latest analysis for Creative Newtech
How Is Creative Newtech's Growth Trending?
Creative Newtech's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.3%. Still, the latest three year period has seen an excellent 107% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Creative Newtech is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Creative Newtech currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Plus, you should also learn about this 1 warning sign we've spotted with Creative Newtech.
If these risks are making you reconsider your opinion on Creative Newtech, 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.