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Corporate Travel Management Limited's (ASX:CTD) Price Is Out Of Tune With Earnings

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It's not a stretch to say that Corporate Travel Management Limited's (ASX:CTD) price-to-earnings (or "P/E") ratio of 16x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Corporate Travel Management hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Corporate Travel Management

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

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Corporate Travel Management would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 56% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% each year as estimated by the nine analysts watching the company. Meanwhile, the broader market is forecast to expand by 13% each year, which paints a poor picture.

In light of this, it's somewhat alarming that Corporate Travel Management's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

What We Can Learn From Corporate Travel Management's P/E?

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 Corporate Travel Management currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Corporate Travel Management that you should be aware of.

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 P/E below 20x.

This article by Simply Wall St is general in nature. 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.

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