Pro-Dex, Inc. (NASDAQ:PDEX) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Pro-Dex, Inc. (NASDAQ:PDEX) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Pro-Dex may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.9x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Pro-Dex certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Pro-Dex

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

How Is Pro-Dex's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Pro-Dex's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 2.7%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 5.2% during the coming year according to the one analyst following the company. With the market predicted to deliver 15% growth , that's a disappointing outcome.

With this information, we find it concerning that Pro-Dex is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Pro-Dex's P/E

The large bounce in Pro-Dex's shares has lifted the company's P/E to a fairly high 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 Pro-Dex's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Pro-Dex that you need to be mindful of.

If you're unsure about the strength of Pro-Dex's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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