The Peria Karamalai Tea and Produce Company Limited's (NSE:PKTEA) Shares Bounce 30% But Its Business Still Trails The Market

The Peria Karamalai Tea and Produce Company Limited (NSE:PKTEA) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 78% in the last year.

Although its price has surged higher, Peria Karamalai Tea and Produce's price-to-earnings (or "P/E") ratio of 28.1x 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 35x and even P/E's above 66x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Peria Karamalai Tea and Produce as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for Peria Karamalai Tea and Produce

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

How Is Peria Karamalai Tea and Produce's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Peria Karamalai Tea and Produce's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 358% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 45% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this information, we are not surprised that Peria Karamalai Tea and Produce is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. 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 Peria Karamalai Tea and Produce's P/E?

Despite Peria Karamalai Tea and Produce's shares building up a head of steam, its P/E still lags most other companies. 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 Peria Karamalai Tea and Produce 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Peria Karamalai Tea and Produce (1 is significant!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.