Filatex India Limited's (NSE:FILATEX) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Filatex India Limited (NSE:FILATEX) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

In spite of the firm bounce in price, Filatex India may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.5x, since almost half of all companies in India have P/E ratios greater than 27x and even P/E's higher than 51x are not unusual. 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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Filatex India has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable 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 Filatex India

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 Filatex India's earnings, revenue and cash flow.

How Is Filatex India's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Filatex India's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 21%. However, this wasn't enough as the latest three year period has seen a very unpleasant 55% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Filatex India is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Filatex India's P/E?

The latest share price surge wasn't enough to lift Filatex India's P/E close to the market median. 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 Filatex India maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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.

You need to take note of risks, for example - Filatex India has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.