Frog Cellsat Limited's (NSE:FROG) 62% Share Price Surge Not Quite Adding Up

Frog Cellsat Limited (NSE:FROG) shareholders have had their patience rewarded with a 62% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 69%.

Even after such a large jump in price, there still wouldn't be many who think Frog Cellsat's price-to-earnings (or "P/E") ratio of 29x is worth a mention when the median P/E in India is similar at about 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For example, consider that Frog Cellsat's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Frog Cellsat

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

How Is Frog Cellsat's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Frog Cellsat's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 10% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Frog Cellsat is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Frog Cellsat's P/E?

Its shares have lifted substantially and now Frog Cellsat's P/E is also back up 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 Frog Cellsat currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

You need to take note of risks, for example - Frog Cellsat has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

You might be able to find a better investment than Frog Cellsat. 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.