Texmaco Rail & Engineering Limited's (NSE:TEXRAIL) 29% Dip In Price Shows Sentiment Is Matching Earnings

Unfortunately for some shareholders, the Texmaco Rail & Engineering Limited (NSE:TEXRAIL) share price has dived 29% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

Since its price has dipped substantially, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may consider Texmaco Rail & Engineering as an attractive investment with its 20.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Texmaco Rail & Engineering as its earnings have been rising faster than most other companies. 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 Texmaco Rail & Engineering

Want the full picture on analyst estimates for the company? Then our free report on Texmaco Rail & Engineering will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 146% gain to the company's bottom line. Pleasingly, EPS has also lifted 358% 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 2.9% as estimated by the two analysts watching the company. That's not great when the rest of the market is expected to grow by 25%.

With this information, we are not surprised that Texmaco Rail & Engineering is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Texmaco Rail & Engineering's P/E

Texmaco Rail & Engineering's recently weak share price has pulled its P/E below most other companies. 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.

As we suspected, our examination of Texmaco Rail & Engineering's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Texmaco Rail & Engineering is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Texmaco Rail & Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.