Ameya Precision Engineers Limited (NSE:AMEYA) Surges 31% Yet Its Low P/E Is No Reason For Excitement

Ameya Precision Engineers Limited (NSE:AMEYA) shareholders have had their patience rewarded with a 31% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 27x, you may still consider Ameya Precision Engineers as an attractive investment with its 20.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

As an illustration, earnings have deteriorated at Ameya Precision Engineers over the last year, which is not ideal at all. 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. 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 Ameya Precision Engineers

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

Is There Any Growth For Ameya Precision Engineers?

In order to justify its P/E ratio, Ameya Precision Engineers would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 18% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we are not surprised that Ameya Precision Engineers 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.

What We Can Learn From Ameya Precision Engineers' P/E?

Despite Ameya Precision Engineers' shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ameya Precision Engineers maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 5 warning signs for Ameya Precision Engineers (3 are a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Ameya Precision Engineers, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.