Damodar Industries Limited (NSE:DAMODARIND) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

Damodar Industries Limited (NSE:DAMODARIND) shares have had a horrible month, losing 26% after a relatively good period beforehand. The last month has meant the stock is now only up 9.8% during the last year.

In spite of the heavy fall in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may still consider Damodar Industries as a stock to potentially avoid with its 31.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Damodar Industries over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Damodar Industries

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 Damodar Industries' earnings, revenue and cash flow.

How Is Damodar Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Damodar Industries' is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 55%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Damodar Industries is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

There's still some solid strength behind Damodar Industries' P/E, if not its share price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Damodar Industries currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 5 warning signs we've spotted with Damodar Industries (including 1 which shouldn't be ignored).

If these risks are making you reconsider your opinion on Damodar Industries, 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.