There's No Escaping Ahluwalia Contracts (India) Limited's (NSE:AHLUCONT) Muted Earnings Despite A 28% Share Price Rise

Ahluwalia Contracts (India) Limited (NSE:AHLUCONT) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Although its price has surged higher, Ahluwalia Contracts (India)'s price-to-earnings (or "P/E") ratio of 17.1x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 26x and even P/E's above 49x are quite common. 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 advantageous for Ahluwalia Contracts (India) 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Ahluwalia Contracts (India)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ahluwalia Contracts (India).

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Ahluwalia Contracts (India)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 29%. The latest three year period has also seen an excellent 112% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 17% as estimated by the twelve analysts watching the company. With the market predicted to deliver 25% growth , that's a disappointing outcome.

With this information, we are not surprised that Ahluwalia Contracts (India) 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Ahluwalia Contracts (India)'s P/E

The latest share price surge wasn't enough to lift Ahluwalia Contracts (India)'s P/E close to the market median. 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 Ahluwalia Contracts (India) maintains its low P/E on the weakness of its forecast for sliding earnings, 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 these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Ahluwalia Contracts (India) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.