Should I buy this dirt-cheap penny stock for growth and returns?

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

Identifying the best penny shares that could go from diamonds in the rough to a lucrative stock providing consistent returns is a key part of my investment strategy. One penny stock I am currently considering is Renold (LSE:RNO). Should I buy the shares for my holdings? Lets consider the pros and cons to help me decide.

Industrial chains

As a quick introduction, Renold is a UK-based manufacturer of industrial conveyor chains as well as other machine components. With a worldwide presence, it serves many industries including but not limited to agriculture, construction, energy, and mining.

It is worth remembering that a penny stock is one that trades for less than £1. At current levels, Renold shares are trading for 24p. At this time last year, the stock was trading for 19p, which is to a 26% return over a 12-month period.

To buy or not to buy?

So what are the pros and cons of my buying Renold shares?

FOR: I’m buoyed by Renold’s history, presence, and profile, especially as a penny stock. The business has history stretching back to the 1800s and has impressively grown into a worldwide business. In fact, it derives most of its revenue from the Americas, and also serves the Chinese market too. Another plus point for me as a potential investor is that Renold has diversified its business model through offering a number of different flagship products. All of these products have multiple applications across a wide range of industries. This diversification could help boost performance and potential returns over time.

AGAINST: Current macroeconomic headwinds could pose a real threat to Renold’s growth and performance. Soaring inflation, the rising cost of raw materials, as well as the supply chain crisis could all have an impact. Rising costs could affect profit margins. Supply chain issues could have an impact on operations too. This is something I will keep a close eye on.

FOR: At current levels, Renold shares look dirt-cheap on a price-to-earnings ratio of just five. If I were to open a small position in the penny stock, I would not be risking too much of my cash.

AGAINST: One thing I did note from recent trading updates provided by Renold was the absence of a dividend. It said it is anticipating cost challenges linked to the macroeconomic headwinds noted above. Furthermore, it is investing cash in streamlining processes and working practices to support longer-term growth. I do believe Renold could pay dividends at some point in the future, however.

A penny stock I would buy

Taking into account the pros and cons, I would be willing to add a small number of Renold shares to my holdings. The shares look cheap, so I wouldn’t be risking too much money. Furthermore, city analysts are upbeat on the company’s earnings growth expectations in the coming years too. I believe Renold shares could provide stable returns in the long term as the business continues to grow.

The post Should I buy this dirt-cheap penny stock for growth and returns? appeared first on The Motley Fool UK.

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Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.