The Indian Hume Pipe Company Limited (NSE:INDIANHUME) Shares Fly 28% But Investors Aren't Buying For Growth

The Indian Hume Pipe Company Limited (NSE:INDIANHUME) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last month tops off a massive increase of 143% in the last year.

In spite of the firm bounce in price, Indian Hume Pipe's price-to-earnings (or "P/E") ratio of 23.7x 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 32x and even P/E's above 61x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Indian Hume Pipe has been doing relatively well. 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.

Check out our latest analysis for Indian Hume Pipe

Want the full picture on analyst estimates for the company? Then our free report on Indian Hume Pipe will help you uncover what's on the horizon.

Is There Any Growth For Indian Hume Pipe?

The only time you'd be truly comfortable seeing a P/E as low as Indian Hume Pipe's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. Pleasingly, EPS has also lifted 70% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 6.7% as estimated by the only analyst watching the company. With the market predicted to deliver 25% growth , that's a disappointing outcome.

With this information, we are not surprised that Indian Hume Pipe is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Indian Hume Pipe's P/E?

Despite Indian Hume Pipe's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Indian Hume Pipe maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 4 warning signs for Indian Hume Pipe (1 is significant!) that we have uncovered.

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.