Suryalakshmi Cotton Mills Limited's (NSE:SURYALAXMI) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Suryalakshmi Cotton Mills Limited (NSE:SURYALAXMI) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Even after such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") above 21x, you may still consider Suryalakshmi Cotton Mills as a highly attractive investment with its 4.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been quite advantageous for Suryalakshmi Cotton Mills as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Suryalakshmi Cotton Mills

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Suryalakshmi Cotton Mills' earnings, revenue and cash flow.

Is There Any Growth For Suryalakshmi Cotton Mills?

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

Retrospectively, the last year delivered an exceptional 140% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Suryalakshmi Cotton Mills is trading at a P/E lower than the market. 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 Final Word

Shares in Suryalakshmi Cotton Mills are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Suryalakshmi Cotton 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Suryalakshmi Cotton Mills (including 1 which is a bit concerning).

If you're unsure about the strength of Suryalakshmi Cotton Mills' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.