Earnings Working Against Summit Securities Limited's (NSE:SUMMITSEC) Share Price Following 26% Dive

Summit Securities Limited (NSE:SUMMITSEC) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 111% in the last twelve months.

In spite of the heavy fall in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Summit Securities as an attractive investment with its 26.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Summit Securities has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Summit Securities

Although there are no analyst estimates available for Summit Securities, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Summit Securities' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Summit Securities' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Summit Securities 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 Summit Securities' P/E

Summit Securities' recently weak share price has pulled its P/E below most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Summit Securities revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 2 warning signs for Summit Securities (1 is potentially serious) you should be aware of.

If these risks are making you reconsider your opinion on Summit Securities, 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.