Market Cool On EMS Limited's (NSE:EMSLIMITED) Earnings Pushing Shares 27% Lower

EMS Limited (NSE:EMSLIMITED) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 19% in the last year.

Even after such a large drop in price, EMS' price-to-earnings (or "P/E") ratio of 18.6x 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 27x and even P/E's above 51x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for EMS recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for EMS

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow EPS by 100% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's about the same on an annualised basis.

With this information, we find it odd that EMS is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.

The Key Takeaway

The softening of EMS' 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.

Our examination of EMS revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

It is also worth noting that we have found 2 warning signs for EMS that you need to take into consideration.

You might be able to find a better investment than EMS. 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.