CTS International Logistics Corporation Limited's (SHSE:603128) price-to-earnings (or "P/E") ratio of 12.6x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 59x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
CTS International Logistics hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Is There Any Growth For CTS International Logistics?
There's an inherent assumption that a company should far underperform the market for P/E ratios like CTS International Logistics' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. Even so, admirably EPS has lifted 46% in aggregate from three years ago, notwithstanding the last 12 months. 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.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 27% over the next year. That's shaping up to be materially lower than the 37% growth forecast for the broader market.
In light of this, it's understandable that CTS International Logistics' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
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.
As we suspected, our examination of CTS International Logistics' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 1 warning sign for CTS International Logistics that we have uncovered.
Of course, you might also be able to find a better stock than CTS International Logistics. 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.