Aakash Exploration Services Limited (NSE:AAKASH) Held Back By Insufficient Growth Even After Shares Climb 56%

Aakash Exploration Services Limited (NSE:AAKASH) shares have continued their recent momentum with a 56% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.

Although its price has surged higher, Aakash Exploration Services may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 26x, since almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For instance, Aakash Exploration Services' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

See our latest analysis for Aakash Exploration 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 Aakash Exploration 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 Aakash Exploration Services' is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. The last three years don't look nice either as the company has shrunk EPS by 4.0% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 26% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Aakash Exploration Services' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Aakash Exploration Services' P/E?

Aakash Exploration Services' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Aakash Exploration Services revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

Before you take the next step, you should know about the 2 warning signs for Aakash Exploration Services (1 doesn't sit too well with us!) that we have uncovered.

You might be able to find a better investment than Aakash Exploration Services. 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).

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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.