Improved Earnings Required Before L.G. Balakrishnan & Bros Limited (NSE:LGBBROSLTD) Stock's 29% Jump Looks Justified

L.G. Balakrishnan & Bros Limited (NSE:LGBBROSLTD) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 36%.

Although its price has surged higher, L.G. Balakrishnan & Bros' price-to-earnings (or "P/E") ratio of 18.1x 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 28x and even P/E's above 54x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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There hasn't been much to differentiate L.G. Balakrishnan & Bros' and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Is There Any Growth For L.G. Balakrishnan & Bros?

There's an inherent assumption that a company should underperform the market for P/E ratios like L.G. Balakrishnan & Bros' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The solid recent performance means it was also able to grow EPS by 21% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 3.0% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we can see why L.G. Balakrishnan & Bros is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On L.G. Balakrishnan & Bros' P/E

The latest share price surge wasn't enough to lift L.G. Balakrishnan & Bros' P/E close to the market median. 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 L.G. Balakrishnan & Bros maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for L.G. Balakrishnan & Bros that you should be aware of.

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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.