Why We're Not Concerned Yet About Propel Holdings Inc.'s (TSE:PRL) 26% Share Price Plunge

Propel Holdings Inc. (TSE:PRL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 83% in the last year.

Although its price has dipped substantially, Propel Holdings' price-to-earnings (or "P/E") ratio of 19.7x might still make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Propel Holdings as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Propel Holdings

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Is There Enough Growth For Propel Holdings?

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

If we review the last year of earnings growth, the company posted a terrific increase of 78%. The strong recent performance means it was also able to grow EPS by 261% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 38% per annum as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.

In light of this, it's understandable that Propel Holdings' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Propel Holdings' P/E hasn't come down all the way after its stock plunged. 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 Propel Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with Propel Holdings (including 2 which are potentially serious).

Of course, you might also be able to find a better stock than Propel Holdings. 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.