Investors Don't See Light At End Of Siyaram Silk Mills Limited's (NSE:SIYSIL) Tunnel And Push Stock Down 26%

Siyaram Silk Mills Limited (NSE:SIYSIL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 37%, which is great even in a bull market.

In spite of the heavy fall in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Siyaram Silk Mills as an attractive investment with its 16.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Siyaram Silk Mills' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, 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 Siyaram Silk Mills

Although there are no analyst estimates available for Siyaram Silk Mills, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Siyaram Silk Mills' Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.1%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Siyaram Silk Mills' 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 Siyaram Silk Mills' P/E

The softening of Siyaram Silk Mills' shares means its P/E is now sitting at a pretty low level. 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 Siyaram Silk Mills maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Siyaram Silk Mills (1 is a bit concerning!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.