Gujarat Apollo Industries Limited (NSE:GUJAPOLLO) Shares Slammed 31% But Getting In Cheap Might Be Difficult Regardless

Gujarat Apollo Industries Limited (NSE:GUJAPOLLO) shares have had a horrible month, losing 31% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 5.0% over that longer period.

Although its price has dipped substantially, Gujarat Apollo Industries may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 30.8x, since almost half of all companies in India have P/E ratios under 24x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Gujarat Apollo Industries over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Gujarat Apollo Industries

Although there are no analyst estimates available for Gujarat Apollo Industries, 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 High P/E?

In order to justify its P/E ratio, Gujarat Apollo Industries would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. Even so, admirably EPS has lifted 351% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is only predicted to deliver 25% 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 understandable that Gujarat Apollo Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Gujarat Apollo Industries' P/E hasn't come down all the way after its stock plunged. 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 Gujarat Apollo Industries maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Gujarat Apollo Industries (of which 1 is a bit concerning!) you should know about.

Of course, you might also be able to find a better stock than Gujarat Apollo Industries. 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.