Why Investors Shouldn't Be Surprised By Vascon Engineers Limited's (NSE:VASCONEQ) 25% Share Price Plunge

Vascon Engineers Limited (NSE:VASCONEQ) shares have had a horrible month, losing 25% after a relatively good period beforehand. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 121% in the last twelve months.

Following the heavy fall in price, Vascon Engineers' price-to-earnings (or "P/E") ratio of 13.2x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 29x and even P/E's above 54x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Vascon Engineers 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Vascon Engineers

Although there are no analyst estimates available for Vascon Engineers, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as depressed as Vascon Engineers' is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 66% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Vascon Engineers is trading at a P/E lower than the market. 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 Key Takeaway

Vascon Engineers' P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Vascon Engineers maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Vascon Engineers that you need to take into consideration.

You might be able to find a better investment than Vascon Engineers. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.