Petgo Corporation (TSE:7140) Stock's 25% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Petgo Corporation (TSE:7140) share price has fared very poorly over the last month, falling by a substantial 25%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Petgo's price-to-earnings (or "P/E") ratio of 15.8x is worth a mention when the median P/E in Japan is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Petgo hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for Petgo

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Petgo.

How Is Petgo's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 58%. This means it has also seen a slide in earnings over the longer-term as EPS is down 2.1% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 95% during the coming year according to the only analyst following the company. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

In light of this, it's curious that Petgo's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Petgo's P/E?

With its share price falling into a hole, the P/E for Petgo looks quite average now. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Petgo currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Petgo that you need to be mindful of.

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