Optical Cable Corporation's (NASDAQ:OCC) Prospects Need A Boost To Lift Shares
With a price-to-earnings (or "P/E") ratio of 8.5x Optical Cable Corporation (NASDAQ:OCC) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 16x and even P/E's higher than 31x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
As an illustration, earnings have deteriorated at Optical Cable over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.
Check out our latest analysis for Optical Cable
Although there are no analyst estimates available for Optical Cable, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Optical Cable's is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.7%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 5.8% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that Optical Cable's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Final Word
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.
As we suspected, our examination of Optical Cable revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Optical Cable that you should be aware of.
If these risks are making you reconsider your opinion on Optical Cable, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
