S.P. Apparels Limited (NSE:SPAL) Might Not Be As Mispriced As It Looks After Plunging 27%

S.P. Apparels Limited (NSE:SPAL) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 16% in the last year.

Even after such a large drop in price, S.P. Apparels may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.3x, since almost half of all companies in India have P/E ratios greater than 25x and even P/E's higher than 48x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

S.P. Apparels could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

View our latest analysis for S.P. Apparels

Keen to find out how analysts think S.P. Apparels' future stacks up against the industry? In that case, our free report is a great place to start.

How Is S.P. Apparels' Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 14%. This was backed up an excellent period prior to see EPS up by 36% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 22% per year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we find it odd that S.P. Apparels is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From S.P. Apparels' P/E?

S.P. Apparels' P/E has taken a tumble along with its share price. 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 S.P. Apparels currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for S.P. Apparels that you should be aware of.

You might be able to find a better investment than S.P. Apparels. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.