BF Utilities Limited's (NSE:BFUTILITIE) Price Is Right But Growth Is Lacking After Shares Rocket 39%

BF Utilities Limited (NSE:BFUTILITIE) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, BF Utilities' price-to-earnings (or "P/E") ratio of 22.3x 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 32x and even P/E's above 59x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

BF Utilities has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for BF Utilities

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

How Is BF Utilities' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as BF Utilities' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that BF Utilities' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On BF Utilities' P/E

BF Utilities' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of BF Utilities revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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 rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for BF Utilities you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.