Little Excitement Around Everybody Loves Languages Corp.'s (CVE:ELL) Earnings As Shares Take 27% Pounding

To the annoyance of some shareholders, Everybody Loves Languages Corp. (CVE:ELL) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 33% in the last year.

In spite of the heavy fall in price, Everybody Loves Languages' price-to-earnings (or "P/E") ratio of 5.1x might still make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 17x and even P/E's above 30x 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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Everybody Loves Languages has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Everybody Loves Languages

Although there are no analyst estimates available for Everybody Loves Languages, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Everybody Loves Languages' Growth Trending?

In order to justify its P/E ratio, Everybody Loves Languages would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.9% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 68% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Everybody Loves Languages' 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 recent earnings trends are already weighing down the shares.

What We Can Learn From Everybody Loves Languages' P/E?

Shares in Everybody Loves Languages have plummeted and its P/E is now low enough to touch the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Everybody Loves Languages revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Everybody Loves Languages (1 is concerning!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.