Getting In Cheap On Paisalo Digital Limited (NSE:PAISALO) Is Unlikely

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 11x, you may consider Paisalo Digital Limited (NSE:PAISALO) as a stock to potentially avoid with its 17.1x 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 lofty.

For example, consider that Paisalo Digital's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Paisalo Digital

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Paisalo Digital would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. This means it has also seen a slide in earnings over the longer-term as EPS is down 5.9% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

For that matter, there's little to separate that medium-term earnings trajectory on an annualised basis against the broader market's one-year forecast for a contraction of 2.8% either.

With this information, it's perhaps curious that Paisalo Digital is trading at a higher P/E in comparison. With earnings going in reverse, it's not guaranteed that the P/E has found a floor yet. There's strong potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

What We Can Learn From Paisalo Digital's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Paisalo Digital revealed its three-year contraction in earnings isn't impacting its high P/E as much as we would have predicted, given the market is set to shrink at a similar rate. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. In addition, we are concerned whether the company can maintain its medium-term level of performance under these tough market conditions. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Paisalo Digital (1 shouldn't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on Paisalo Digital, 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. 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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