There's No Escaping Siyaram Silk Mills Limited's (NSE:SIYSIL) Muted Earnings Despite A 28% Share Price Rise

The Siyaram Silk Mills Limited (NSE:SIYSIL) share price has done very well over the last month, posting an excellent gain of 28%. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Siyaram Silk Mills' price-to-earnings (or "P/E") ratio of 14.5x 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 34x and even P/E's above 63x 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.

As an illustration, earnings have deteriorated at Siyaram Silk Mills over the last year, which is not ideal at all. 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.

Check out our latest analysis for Siyaram Silk Mills

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

How Is Siyaram Silk Mills' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's bottom line. Even so, admirably EPS has lifted 32% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome 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.

With this information, we can see why Siyaram Silk Mills is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Siyaram Silk Mills' P/E

Even after such a strong price move, Siyaram Silk Mills' P/E still trails the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Siyaram Silk Mills, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Siyaram Silk Mills. 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.