There's No Escaping Universal Cables Limited's (NSE:UNIVCABLES) Muted Earnings Despite A 25% Share Price Rise

Universal Cables Limited (NSE:UNIVCABLES) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

Although its price has surged higher, Universal Cables' price-to-earnings (or "P/E") ratio of 20.4x 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 53x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Universal Cables has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 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.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 50% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

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

With this information, we can see why Universal Cables is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Universal Cables' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Universal Cables has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of Universal Cables' 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.