Improved Earnings Required Before Intense Technologies Limited (NSE:INTENTECH) Stock's 28% Jump Looks Justified

Intense Technologies Limited (NSE:INTENTECH) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

In spite of the firm bounce in price, Intense Technologies' price-to-earnings (or "P/E") ratio of 20.5x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 29x and even P/E's above 55x 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 limited.

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As an illustration, earnings have deteriorated at Intense Technologies 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.

View our latest analysis for Intense Technologies

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

How Is Intense Technologies' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Intense Technologies' is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. This means it has also seen a slide in earnings over the longer-term as EPS is down 37% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Intense Technologies' 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. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Intense Technologies' P/E

The latest share price surge wasn't enough to lift Intense Technologies' P/E close to the market median. 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.

We've established that Intense Technologies maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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.

You should always think about risks. Case in point, we've spotted 5 warning signs for Intense Technologies you should be aware of, and 1 of them can't be ignored.

You might be able to find a better investment than Intense Technologies. 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.