Gujarat Mineral Development Corporation Limited (NSE:GMDCLTD) Shares Fly 28% But Investors Aren't Buying For Growth

Gujarat Mineral Development Corporation Limited (NSE:GMDCLTD) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

Although its price has surged higher, Gujarat Mineral Development may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.3x, since almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 54x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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There hasn't been much to differentiate Gujarat Mineral Development's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Gujarat Mineral Development would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 6.5% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

With this information, we can see why Gujarat Mineral Development is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Gujarat Mineral Development's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Gujarat Mineral Development maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Gujarat Mineral Development that you should be aware of.

You might be able to find a better investment than Gujarat Mineral 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).

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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.