Improved Earnings Required Before Nahar Capital and Financial Services Limited (NSE:NAHARCAP) Stock's 31% Jump Looks Justified

Despite an already strong run, Nahar Capital and Financial Services Limited (NSE:NAHARCAP) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

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 19x, you may still consider Nahar Capital and Financial Services as an attractive investment with its 10.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, Nahar Capital and Financial Services 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 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 Nahar Capital and Financial Services

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 Nahar Capital and Financial Services' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as low as Nahar Capital and Financial Services' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 335% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.6% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 30% shows it's an unpleasant look.

In light of this, it's understandable that Nahar Capital and Financial Services' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Nahar Capital and Financial Services' P/E

Despite Nahar Capital and Financial Services' shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Nahar Capital and Financial Services maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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 moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Nahar Capital and Financial Services is showing 5 warning signs in our investment analysis, and 1 of those is a bit concerning.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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This article by Simply Wall St is general in nature. 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.
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