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The CECO Environmental Corp. (NASDAQ:CECE) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% 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 19x, you may consider CECO Environmental as an attractive investment with its 14.2x P/E ratio. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, CECO Environmental has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

See our latest analysis for CECO Environmental

Want the full picture on analyst estimates for the company? Then our free report on CECO Environmental will help you uncover what’s on the horizon.

Does Growth Match The Low P/E?

There’s an inherent assumption that a company should underperform the market for P/E ratios like CECO Environmental’s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 42%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it’s fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 24% during the coming year according to the four analysts following the company. That’s not great when the rest of the market is expected to grow by 13%.

In light of this, it’s understandable that CECO Environmental’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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

CECO Environmental’s recently weak share price has pulled its P/E below most other companies. While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.

As we suspected, our examination of CECO Environmental’s analyst forecasts revealed that its outlook for shrinking earnings 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.

It is also worth noting that we have found 2 warning signs for CECO Environmental that you need to take into consideration.

Of course, you might also be able to find a better stock than CECO Environmental. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.

This article by Simply Wall St is general in nature. 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.

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