Bon Natural Life Limited (NASDAQ:BON) Held Back By Insufficient Growth Even After Shares Climb 27%

Bon Natural Life Limited (NASDAQ:BON) shares have had a really impressive month, gaining 27% after a shaky period beforehand. But the last month did very little to improve the 69% share price decline over the last year.

Although its price has surged higher, Bon Natural Life's price-to-earnings (or "P/E") ratio of 3x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 35x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For example, consider that Bon Natural Life's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 our latest analysis for Bon Natural Life

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

How Is Bon Natural Life's Growth Trending?

In order to justify its P/E ratio, Bon Natural Life would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 91% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 15% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Bon Natural Life's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Bon Natural Life's P/E

Shares in Bon Natural Life are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

We've established that Bon Natural Life maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Bon Natural Life (at least 2 which can't be ignored), and understanding them should be part of your investment process.

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.