Benign Growth For Carote Ltd (HKG:2549) Underpins Stock's 29% Plummet

The Carote Ltd (HKG:2549) share price has fared very poorly over the last month, falling by a substantial 29%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, Carote's price-to-earnings (or "P/E") ratio of 5.5x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 21x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Carote 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Carote

Is There Any Growth For Carote?

The only time you'd be truly comfortable seeing a P/E as low as Carote's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. The latest three year period has also seen an excellent 717% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 6.8% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is noticeably more attractive.

With this information, we can see why Carote is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Carote's P/E

Carote's P/E has taken a tumble along with its share price. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Carote maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Carote, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Carote. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.