Market Cool On Eimco Elecon (India) Limited's (NSE:EIMCOELECO) Earnings Pushing Shares 27% Lower

To the annoyance of some shareholders, Eimco Elecon (India) Limited (NSE:EIMCOELECO) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, Eimco Elecon (India)'s price-to-earnings (or "P/E") ratio of 18.5x 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 30x and even P/E's above 57x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Eimco Elecon (India) has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Eimco Elecon (India)

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Eimco Elecon (India)'s earnings, revenue and cash flow.

Is There Any Growth For Eimco Elecon (India)?

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

If we review the last year of earnings growth, the company posted a terrific increase of 40%. The latest three year period has also seen an excellent 814% 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.

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

With this information, we find it odd that Eimco Elecon (India) is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Eimco Elecon (India)'s P/E?

Eimco Elecon (India)'s P/E has taken a tumble along with its share price. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Eimco Elecon (India) currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Eimco Elecon (India) that you should be aware of.

Of course, you might also be able to find a better stock than Eimco Elecon (India). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.