Earnings Not Telling The Story For Palms Sports PJSC (ADX:PALMS) After Shares Rise 26%

Explore Palms Sports PJSC's Fair Values from the Community and select yours

Palms Sports PJSC (ADX:PALMS) shares have continued their recent momentum with a 26% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Palms Sports PJSC's P/E ratio of 12.7x, since the median price-to-earnings (or "P/E") ratio in the United Arab Emirates is also close to 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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The recent earnings growth at Palms Sports PJSC would have to be considered satisfactory if not spectacular. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Palms Sports PJSC

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Palms Sports PJSC's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Palms Sports PJSC's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 2.7% gain to the company's bottom line. EPS has also lifted 11% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.2% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Palms Sports PJSC is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Palms Sports PJSC's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Palms Sports PJSC revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Palms Sports PJSC, and understanding should be part of your investment process.

You might be able to find a better investment than Palms Sports PJSC. 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.