Not Many Are Piling Into Swaraj Suiting Limited (NSE:SWARAJ) Just Yet

Swaraj Suiting Limited's (NSE:SWARAJ) price-to-earnings (or "P/E") ratio of 12.8x might 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 28x and even P/E's above 54x 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.

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With earnings growth that's exceedingly strong of late, Swaraj Suiting has been doing very well. 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 Swaraj Suiting

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 Swaraj Suiting's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Swaraj Suiting would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. The strong recent performance means it was also able to grow EPS by 379% 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.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Swaraj Suiting is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Swaraj Suiting revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Swaraj Suiting (2 are a bit unpleasant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.