S.P. Apparels Limited's (NSE:SPAL) Price Is Right But Growth Is Lacking After Shares Rocket 25%

S.P. Apparels Limited (NSE:SPAL) shareholders have had their patience rewarded with a 25% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 55%.

Even after such a large jump in price, S.P. Apparels may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.7x, since almost half of all companies in India have P/E ratios greater than 33x and even P/E's higher than 64x 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.

Recent times haven't been advantageous for S.P. Apparels as its earnings have been rising slower than most other companies. 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.

Does Growth Match The Low P/E?

S.P. Apparels' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 10%. This was backed up an excellent period prior to see EPS up by 113% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 22% per year growth forecast for the broader market.

With this information, we can see why S.P. Apparels is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On S.P. Apparels' P/E

S.P. Apparels' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of S.P. Apparels' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for S.P. Apparels you should know about.

If these risks are making you reconsider your opinion on S.P. Apparels, 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.

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