Market Cool On Paragon Care Limited's (ASX:PGC) Earnings Pushing Shares 28% Lower
Paragon Care Limited (ASX:PGC) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 53% share price decline.
After such a large drop in price, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 22x, you may consider Paragon Care as an attractive investment with its 18.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Paragon Care certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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 Paragon Care
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Paragon Care's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 85% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 18% per year, which is noticeably less attractive.
With this information, we find it odd that Paragon Care is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On Paragon Care's P/E
Paragon Care's recently weak share price has pulled its P/E below most other companies. 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.
We've established that Paragon Care currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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.
It is also worth noting that we have found 1 warning sign for Paragon Care that you need to take into consideration.
You might be able to find a better investment than Paragon Care. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.