Emkay Taps and Cutting Tools Limited (NSE:EMKAYTOOLS) Might Not Be As Mispriced As It Looks After Plunging 60%

Emkay Taps and Cutting Tools Limited (NSE:EMKAYTOOLS) shares have had a horrible month, losing 60% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 19% in that time.

Even after such a large drop in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Emkay Taps and Cutting Tools as a highly attractive investment with its 5.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Emkay Taps and Cutting Tools has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Emkay Taps and Cutting Tools

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 Emkay Taps and Cutting Tools' earnings, revenue and cash flow.

How Is Emkay Taps and Cutting Tools' Growth Trending?

In order to justify its P/E ratio, Emkay Taps and Cutting Tools 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 72% last year. The strong recent performance means it was also able to grow EPS by 164% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 26% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Emkay Taps and Cutting Tools' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Emkay Taps and Cutting Tools' P/E?

Shares in Emkay Taps and Cutting Tools have plummeted and its P/E is now low enough to touch the ground. 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 Emkay Taps and Cutting Tools currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. 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 and we've discovered 3 warning signs for Emkay Taps and Cutting Tools (2 make us uncomfortable!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Emkay Taps and Cutting Tools, 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.