Improved Earnings Required Before Housing and Urban Development Corporation Limited (NSE:HUDCO) Stock's 27% Jump Looks Justified

Housing and Urban Development Corporation Limited (NSE:HUDCO) shareholders have had their patience rewarded with a 27% share price jump in the last month. The annual gain comes to 112% 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 11.8x might still 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 29x and even P/E's above 54x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

It looks like earnings growth has deserted Housing and Urban Development recently, which is not something to boast about. It might be that many expect the uninspiring earnings performance to worsen, which has repressed the P/E. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Housing and Urban Development

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

Is There Any Growth For Housing and Urban Development?

The only time you'd be truly comfortable seeing a P/E as depressed as Housing and Urban Development's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 37% overall rise in EPS, in spite of its uninspiring short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% 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 Housing and Urban Development is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Housing and Urban Development's P/E

Shares in Housing and Urban Development are going to need a lot more upward momentum to get the company's P/E out of its slump. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Housing and Urban Development maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Housing and Urban Development (2 are a bit unpleasant) you should be aware of.

You might be able to find a better investment than Housing and Urban Development. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.