The Market Doesn't Like What It Sees From Universal Cables Limited's (NSE:UNIVCABLES) Earnings Yet As Shares Tumble 25%

Universal Cables Limited (NSE:UNIVCABLES) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 30% in the last year.

Since its price has dipped substantially, Universal Cables may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.7x, since almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 56x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Universal Cables over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Universal Cables

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Universal Cables' earnings, revenue and cash flow.

Is There Any Growth For Universal Cables?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.7%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Universal Cables' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Universal Cables' P/E

The softening of Universal Cables' shares means its P/E is now sitting at a pretty low level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Universal Cables revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Universal Cables (of which 1 is concerning!) you should know about.

If these risks are making you reconsider your opinion on Universal Cables, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.