Saroja Pharma Industries India Limited (NSE:SAROJA) Shares Fly 46% But Investors Aren't Buying For Growth

Saroja Pharma Industries India Limited (NSE:SAROJA) shares have had a really impressive month, gaining 46% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may still consider Saroja Pharma Industries India as an attractive investment with its 21.8x P/E ratio. 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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Saroja Pharma Industries India has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Saroja Pharma Industries India

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Saroja Pharma Industries India will help you shine a light on its historical performance.

Is There Any Growth For Saroja Pharma Industries India?

There's an inherent assumption that a company should underperform the market for P/E ratios like Saroja Pharma Industries India's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.3% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 35% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Saroja Pharma Industries India's P/E would sit below the majority of other companies. 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Saroja Pharma Industries India's P/E

The latest share price surge wasn't enough to lift Saroja Pharma Industries India's P/E close to the market median. 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 Saroja Pharma Industries India maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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 moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Saroja Pharma Industries India you should know about.

Of course, you might also be able to find a better stock than Saroja Pharma Industries India. 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.