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Unfortunately for some shareholders, the LumiraDx Limited (NASDAQ:LMDX) share price has dived 27% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 78% share price decline.
Following the heavy fall in price, LumiraDx's price-to-earnings (or "P/E") ratio of -0.3x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 16x and even P/E's above 33x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
LumiraDx could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for LumiraDx
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Is There Any Growth For LumiraDx?
There's an inherent assumption that a company should far underperform the market for P/E ratios like LumiraDx's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1,270%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 22% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.
In light of this, it's peculiar that LumiraDx's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Key Takeaway
Shares in LumiraDx have plummeted and its P/E is now low enough to touch the ground. 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.
Our examination of LumiraDx's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.