The Market Doesn't Like What It Sees From GP Petroleums Limited's (NSE:GULFPETRO) Earnings Yet

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may consider GP Petroleums Limited (NSE:GULFPETRO) as a highly attractive investment with its 10.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

GP Petroleums has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for GP Petroleums

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

How Is GP Petroleums' Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 12%. Pleasingly, EPS has also lifted 71% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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 GP Petroleums is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On GP Petroleums' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of GP Petroleums revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for GP Petroleums that you need to be mindful of.

If you're unsure about the strength of GP Petroleums' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.