Ashoka Buildcon Limited (NSE:ASHOKA) Not Doing Enough For Some Investors As Its Shares Slump 26%

Ashoka Buildcon Limited (NSE:ASHOKA) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 3.2% over the last twelve months.

After such a large drop in price, Ashoka Buildcon may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 3.5x, since almost half of all companies in India have P/E ratios greater than 27x and even P/E's higher than 50x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Ashoka Buildcon as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Ashoka Buildcon's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 366% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 117% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 76% over the next year. Meanwhile, the broader market is forecast to expand by 25%, which paints a poor picture.

With this information, we are not surprised that Ashoka Buildcon is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Ashoka Buildcon's P/E

Having almost fallen off a cliff, Ashoka Buildcon's share price has pulled its P/E way down as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Ashoka Buildcon 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Ashoka Buildcon that you should be aware of.

If these risks are making you reconsider your opinion on Ashoka Buildcon, 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.