Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) Surges 26% Yet Its Low P/E Is No Reason For Excitement

Despite an already strong run, Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) shares have been powering on, with a gain of 26% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.0% isn't as impressive.

Even after such a large jump in price, Gujarat Narmada Valley Fertilizers & Chemicals may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.8x, since almost half of all companies in India have P/E ratios greater than 17x and even P/E's higher than 41x are not unusual. 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 Gujarat Narmada Valley Fertilizers & Chemicals' financial performance has been poor lately as it's 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gujarat Narmada Valley Fertilizers & Chemicals will help you shine a light on its historical performance.

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

In order to justify its P/E ratio, Gujarat Narmada Valley Fertilizers & Chemicals would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. As a result, earnings from three years ago have also fallen 3.9% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Gujarat Narmada Valley Fertilizers & Chemicals is trading at a P/E lower than the market. 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 Key Takeaway

Even after such a strong price move, Gujarat Narmada Valley Fertilizers & Chemicals' P/E still trails the rest of the market significantly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Gujarat Narmada Valley Fertilizers & Chemicals 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Gujarat Narmada Valley Fertilizers & Chemicals you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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