Getting In Cheap On Aro Granite Industries Limited (NSE:AROGRANITE) Is Unlikely

There wouldn't be many who think Aro Granite Industries Limited's (NSE:AROGRANITE) price-to-earnings (or "P/E") ratio of 12x is worth a mention when the median P/E in India is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

For instance, Aro Granite Industries' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Aro Granite Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Aro Granite Industries will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Aro Granite Industries' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. This means it has also seen a slide in earnings over the longer-term as EPS is down 74% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to shrink 6.7% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised earnings results.

In light of this, it's somewhat peculiar that Aro Granite Industries' P/E sits in line with the majority of other companies. In general, when earnings shrink rapidly the P/E often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Aro Granite Industries' P/E?

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 Aro Granite Industries currently trades on a higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. When we see below average earnings, we suspect the share price is at risk of declining, sending the moderate P/E lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Aro Granite Industries has 5 warning signs (and 3 which shouldn't be ignored) we think you should know about.

You might be able to find a better investment than Aro Granite Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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