Some Pro-Dex, Inc. (NASDAQ:PDEX) Shareholders Look For Exit As Shares Take 27% Pounding

Pro-Dex, Inc. (NASDAQ:PDEX) shares have had a horrible month, losing 27% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 65% in the last year.

Although its price has dipped substantially, it's still not a stretch to say that Pro-Dex's price-to-earnings (or "P/E") ratio of 16.6x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Pro-Dex as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Pro-Dex

Want the full picture on analyst estimates for the company? Then our free report on Pro-Dex will help you uncover what's on the horizon.

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

The only time you'd be comfortable seeing a P/E like Pro-Dex's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 136%. Pleasingly, EPS has also lifted 56% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 1.8% during the coming year according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to expand by 15%, which is noticeably more attractive.

In light of this, it's curious that Pro-Dex's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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

Pro-Dex's plummeting stock price has brought its P/E right back to the rest of the market. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Pro-Dex's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Pro-Dex that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.