Insufficient Growth At Gujarat Ambuja Exports Limited (NSE:GAEL) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 24.3x Gujarat Ambuja Exports Limited (NSE:GAEL) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 60x 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 example, consider that Gujarat Ambuja Exports' financial performance has been poor lately as its earnings have been in decline. 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.

Check out our latest analysis for Gujarat Ambuja Exports

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

Gujarat Ambuja Exports' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Gujarat Ambuja Exports 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 Key Takeaway

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.

As we suspected, our examination of Gujarat Ambuja Exports 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Gujarat Ambuja Exports with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Gujarat Ambuja Exports, 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.