Pentagon Rubber Limited's (NSE:PENTAGON) Price Is Right But Growth Is Lacking After Shares Rocket 29%

Pentagon Rubber Limited (NSE:PENTAGON) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Pentagon Rubber as an attractive investment with its 19.9x 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 limited.

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As an illustration, earnings have deteriorated at Pentagon Rubber over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Pentagon Rubber

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

Does Growth Match The Low P/E?

Pentagon Rubber's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. As a result, earnings from three years ago have also fallen 37% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Pentagon Rubber's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

The latest share price surge wasn't enough to lift Pentagon Rubber's P/E close to the market median. 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 Pentagon Rubber revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Pentagon Rubber (including 1 which can't be ignored).

You might be able to find a better investment than Pentagon Rubber. 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.