Electrosteel Castings Limited (NSE:ELECTCAST) Shares Fly 28% But Investors Aren't Buying For Growth

Electrosteel Castings Limited (NSE:ELECTCAST) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 200% in the last year.

In spite of the firm bounce in price, Electrosteel Castings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.4x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 66x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Electrosteel Castings certainly has been doing a good job lately as it's been growing earnings more 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.

View our latest analysis for Electrosteel Castings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Electrosteel Castings.

How Is Electrosteel Castings' Growth Trending?

In order to justify its P/E ratio, Electrosteel Castings would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 133% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% during the coming year according to the one analyst following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we can see why Electrosteel Castings is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shares in Electrosteel Castings are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Electrosteel Castings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 Electrosteel Castings that you should be aware of.

Of course, you might also be able to find a better stock than Electrosteel Castings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com