Promisia Healthcare Limited (NZSE:PHL) Stock's 40% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Promisia Healthcare Limited (NZSE:PHL) shares have had a horrible month, losing 40% after a relatively good period beforehand. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Following the heavy fall in price, Promisia Healthcare's price-to-earnings (or "P/E") ratio of 9.6x might make it look like a buy right now compared to the market in New Zealand, where around half of the companies have P/E ratios above 19x and even P/E's above 33x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Promisia Healthcare certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Promisia Healthcare

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Promisia Healthcare will help you shine a light on its historical performance.

How Is Promisia Healthcare's Growth Trending?

Promisia Healthcare'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 growth, the company posted a terrific increase of 135%. The latest three year period has also seen an excellent 2,018% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Promisia Healthcare is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Promisia Healthcare's P/E?

The softening of Promisia Healthcare's shares means its P/E is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Promisia Healthcare revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Promisia Healthcare (of which 3 shouldn't be ignored!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.