Take Care Before Jumping Onto Promisia Healthcare Limited (NZSE:PHL) Even Though It's 50% Cheaper

Promisia Healthcare Limited (NZSE:PHL) shareholders that were waiting for something to happen have been dealt a blow with a 50% share price drop in the last month. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

After such a large drop in price, given close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") above 17x, you may consider Promisia Healthcare as an attractive investment with its 9.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Promisia Healthcare as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out the opportunities and risks within the XX Personal Products industry.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Promisia Healthcare's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 134% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 0.3% shows it's a great look while it lasts.

In light of this, it's quite peculiar that Promisia Healthcare's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Promisia Healthcare's P/E

The softening of Promisia Healthcare's shares means its P/E is now sitting at a pretty low level. 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 Promisia Healthcare currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 5 warning signs for Promisia Healthcare (3 are a bit concerning!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.