Chaman Lal Setia Exports Ltd. (NSE:CLSEL) Looks Inexpensive After Falling 26% But Perhaps Not Attractive Enough

Chaman Lal Setia Exports Ltd. (NSE:CLSEL) shares have had a horrible month, losing 26% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 7.5% over the last twelve months.

Even after such a large drop in price, Chaman Lal Setia Exports' price-to-earnings (or "P/E") ratio of 13.4x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 51x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Chaman Lal Setia Exports' receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Chaman Lal Setia Exports

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 Chaman Lal Setia Exports' earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Chaman Lal Setia Exports would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. Still, the latest three year period has seen an excellent 65% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

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.

In light of this, it's understandable that Chaman Lal Setia Exports' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Chaman Lal Setia Exports' P/E has taken a tumble along with its share price. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Chaman Lal Setia Exports maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 rising strongly in the near future under these circumstances.

Having said that, be aware Chaman Lal Setia Exports is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Chaman Lal Setia Exports. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.