Petrol AD (BUL:PET) Looks Inexpensive After Falling 55% But Perhaps Not Attractive Enough
The Petrol AD (BUL:PET) share price has fared very poorly over the last month, falling by a substantial 55%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 62% loss during that time.
Even after such a large drop in price, Petrol AD's price-to-earnings (or "P/E") ratio of 2.6x might still make it look like a strong buy right now compared to the market in Bulgaria, where around half of the companies have P/E ratios above 22x and even P/E's above 49x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
For instance, Petrol AD's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.
Check out our latest analysis for Petrol AD
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Petrol AD's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 3.3% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Petrol AD is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Bottom Line On Petrol AD's P/E
Having almost fallen off a cliff, Petrol AD's share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Petrol AD revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Petrol AD (of which 2 are a bit unpleasant!) you should know about.
If these risks are making you reconsider your opinion on Petrol AD, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.