Lagnam Spintex Limited (NSE:LAGNAM) Shares Fly 25% But Investors Aren't Buying For Growth

Lagnam Spintex Limited (NSE:LAGNAM) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.0% over the last year.

Even after such a large jump in price, Lagnam Spintex's price-to-earnings (or "P/E") ratio of 18.7x 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. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've discovered 3 warning signs about Lagnam Spintex. View them for free.

With earnings growth that's exceedingly strong of late, Lagnam Spintex has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Lagnam Spintex

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

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 32%. Still, incredibly EPS has fallen 58% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we are not surprised that Lagnam Spintex 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite Lagnam Spintex's shares building up a head of steam, its P/E still lags most other companies. 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 Lagnam Spintex maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. 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 moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Lagnam Spintex (1 doesn't sit too well with us!) that we have uncovered.

Of course, you might also be able to find a better stock than Lagnam Spintex. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.