It's Down 27% But NDR Auto Components Limited (NSE:NDRAUTO) Could Be Riskier Than It Looks

NDR Auto Components Limited (NSE:NDRAUTO) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 18%.

Since its price has dipped substantially, NDR Auto Components may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.6x, since almost half of all companies in India have P/E ratios greater than 20x and even P/E's higher than 45x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for NDR Auto Components as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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.

View our latest analysis for NDR Auto Components

Although there are no analyst estimates available for NDR Auto Components, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like NDR Auto Components' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 74% last year. The strong recent performance means it was also able to grow EPS by 82% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 22% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that NDR Auto Components' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Key Takeaway

NDR Auto Components' recently weak share price has pulled its P/E below most other companies. 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 NDR Auto Components currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

It is also worth noting that we have found 4 warning signs for NDR Auto Components (1 is concerning!) that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.