Paisalo Digital Limited's (NSE:PAISALO) Popularity With Investors Is Clear

Paisalo Digital Limited's (NSE:PAISALO) price-to-earnings (or "P/E") ratio of 21.2x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E's below 6x 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 lofty.

For instance, Paisalo Digital's receding earnings in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Paisalo Digital

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Paisalo Digital will help you shine a light on its historical performance.

Is There Enough Growth For Paisalo Digital?

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

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to shrink 7.3% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we can see why Paisalo Digital is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.

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

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 Paisalo Digital revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Paisalo Digital (1 is significant) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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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