Generic Engineering Construction and Projects Limited (NSE:GENCON) Stock Rockets 26% But Many Are Still Ignoring The Company

Generic Engineering Construction and Projects Limited (NSE:GENCON) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Generic Engineering Construction and Projects' price-to-earnings (or "P/E") ratio of 24.9x 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 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Generic Engineering Construction and Projects' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

Check out our latest analysis for Generic Engineering Construction and Projects

Although there are no analyst estimates available for Generic Engineering Construction and Projects, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 203% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the 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.

With this information, we find it odd that Generic Engineering Construction and Projects 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.

The Bottom Line On Generic Engineering Construction and Projects' P/E

Generic Engineering Construction and Projects' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

Our examination of Generic Engineering Construction and Projects revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. 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 before investing and we've discovered 3 warning signs for Generic Engineering Construction and Projects that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.