Take Care Before Jumping Onto Gensol Engineering Limited (NSE:GENSOL) Even Though It's 26% Cheaper

Unfortunately for some shareholders, the Gensol Engineering Limited (NSE:GENSOL) share price has dived 26% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 95% share price decline.

Following the heavy fall in price, Gensol Engineering may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.2x, since almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 57x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Gensol Engineering certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 Gensol Engineering

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Gensol Engineering 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 86% last year. Pleasingly, EPS has also lifted 841% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Gensol Engineering is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Shares in Gensol Engineering have plummeted and its P/E is now low enough to touch the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Gensol Engineering 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. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Gensol Engineering (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

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.