Benign Growth For Sarla Performance Fibers Limited (NSE:SARLAPOLY) Underpins Stock's 27% Plummet

Sarla Performance Fibers Limited (NSE:SARLAPOLY) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 51%, which is great even in a bull market.

In spite of the heavy fall in price, Sarla Performance Fibers' price-to-earnings (or "P/E") ratio of 13.5x might still 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 31x and even P/E's above 59x 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.

Recent times have been quite advantageous for Sarla Performance Fibers as its earnings have been rising very briskly. 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 Sarla Performance Fibers

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

Is There Any Growth For Sarla Performance Fibers?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 270% last year. As a result, it also grew EPS by 23% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Sarla Performance Fibers' P/E sits below the majority of other companies. 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 Bottom Line On Sarla Performance Fibers' P/E

Sarla Performance Fibers' P/E looks about as weak as its stock price lately. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Sarla Performance Fibers revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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 rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Sarla Performance Fibers (1 is potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Sarla Performance Fibers, 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.