Investors Aren't Buying Charles & Colvard, Ltd.'s (NASDAQ:CTHR) Earnings
Charles & Colvard, Ltd.'s (NASDAQ:CTHR) price-to-earnings (or "P/E") ratio of 4x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 16x and even P/E's above 32x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been advantageous for Charles & Colvard as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Charles & Colvard
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Charles & Colvard.
How Is Charles & Colvard's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Charles & Colvard's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 202%. Pleasingly, EPS has also lifted 430% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 74% over the next year. Meanwhile, the broader market is forecast to expand by 10.0%, which paints a poor picture.
In light of this, it's understandable that Charles & Colvard's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
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 Charles & Colvard 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.
And what about other risks? Every company has them, and we've spotted 5 warning signs for Charles & Colvard (of which 2 are potentially serious!) you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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.
