There's No Escaping Arihant Capital Markets Limited's (NSE:ARIHANTCAP) Muted Earnings Despite A 25% Share Price Rise

Despite an already strong run, Arihant Capital Markets Limited (NSE:ARIHANTCAP) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 38%.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Arihant Capital Markets as an attractive investment with its 21.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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For example, consider that Arihant Capital Markets' financial performance has been poor lately as its earnings have been in decline. 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 Arihant Capital Markets

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

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Arihant Capital Markets' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Arihant Capital Markets' P/E?

The latest share price surge wasn't enough to lift Arihant Capital Markets' P/E close to the market median. 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 Arihant Capital Markets 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Arihant Capital Markets that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.