Power & Instrumental (Gujarat) Limited (NSE:PIGL) Held Back By Insufficient Growth Even After Shares Climb 58%

The Power & Instrumental (Gujarat) Limited (NSE:PIGL) share price has done very well over the last month, posting an excellent gain of 58%. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may still consider Power & Instrumental (Gujarat) as an attractive investment with its 25.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Power & Instrumental (Gujarat) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Power & Instrumental (Gujarat)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Power & Instrumental (Gujarat) will help you shine a light on its historical performance.

Is There Any Growth For Power & Instrumental (Gujarat)?

Power & Instrumental (Gujarat)'s P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 41% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 5.1% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Power & Instrumental (Gujarat) 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Power & Instrumental (Gujarat)'s P/E?

The latest share price surge wasn't enough to lift Power & Instrumental (Gujarat)'s 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 Power & Instrumental (Gujarat) maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Power & Instrumental (Gujarat) (1 makes us a bit uncomfortable!) 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.

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