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PetroTal Corp. (CVE:TAL) Stock's 30% Dive Might Signal An Opportunity But It Requires Some Scrutiny

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PetroTal Corp. (CVE:TAL) shares have had a horrible month, losing 30% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 110%.

Following the heavy fall in price, PetroTal's price-to-earnings (or "P/E") ratio of 4.2x might make it look like a strong buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 11x and even P/E's above 25x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for PetroTal as its earnings have been rising faster than most other companies. 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.

See our latest analysis for PetroTal

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

Does Growth Match The Low P/E?

PetroTal's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 56% last year. 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.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings should grow by 47% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.5% per year, which is noticeably less attractive.

With this information, we find it odd that PetroTal is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Having almost fallen off a cliff, PetroTal's share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of PetroTal's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook 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 these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 4 warning signs for PetroTal (1 is potentially serious!) that you should be aware of.

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

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.

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