Investors Give Palms Sports PJSC (ADX:PALMS) Shares A 31% Hiding

The Palms Sports PJSC (ADX:PALMS) share price has fared very poorly over the last month, falling by a substantial 31%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 50% in that time.

Following the heavy fall in price, Palms Sports PJSC may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.3x, since almost half of all companies in the United Arab Emirates have P/E ratios greater than 14x and even P/E's higher than 23x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Palms Sports PJSC has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform 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 Palms Sports PJSC

Although there are no analyst estimates available for Palms Sports PJSC, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Palms Sports PJSC's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Palms Sports PJSC's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. EPS has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 6.3% shows it's about the same on an annualised basis.

In light of this, it's peculiar that Palms Sports PJSC's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Bottom Line On Palms Sports PJSC's P/E

Palms Sports PJSC'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.

Our examination of Palms Sports PJSC revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Palms Sports PJSC (1 is concerning!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Palms Sports PJSC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.