Even With A 28% Surge, Cautious Investors Are Not Rewarding Housing and Urban Development Corporation Limited's (NSE:HUDCO) Performance Completely

Housing and Urban Development Corporation Limited (NSE:HUDCO) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The annual gain comes to 132% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Housing and Urban Development's price-to-earnings (or "P/E") ratio of 21x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 64x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Housing and Urban Development has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Housing and Urban Development

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Does Growth Match The Low P/E?

Housing and Urban Development's 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 an exceptional 38% gain to the company's bottom line. Pleasingly, EPS has also lifted 46% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the lone analyst following the company. That's shaping up to be similar to the 20% per annum growth forecast for the broader market.

With this information, we find it odd that Housing and Urban Development is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift Housing and Urban Development's P/E close to the market median. 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 Housing and Urban Development currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Housing and Urban Development (2 are significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Housing and Urban Development, 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.