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The The Carlyle Group Inc. (NASDAQ:CG) share price has fared very poorly over the last month, falling by a substantial 27%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 15% share price drop.
Following the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Carlyle Group as a highly attractive investment with its 4.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Carlyle Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
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How Is Carlyle Group's Growth Trending?
In order to justify its P/E ratio, Carlyle Group would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. Pleasingly, EPS has also lifted 301% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 15% each year over the next three years. Meanwhile, the broader market is forecast to expand by 12% per year, which paints a poor picture.
In light of this, it's understandable that Carlyle Group'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
Having almost fallen off a cliff, Carlyle Group's share price has pulled its P/E way down as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.