There's No Escaping Ambica Agarbathies Aroma & Industries Limited's (NSE:AMBICAAGAR) Muted Earnings Despite A 44% Share Price Rise

Ambica Agarbathies Aroma & Industries Limited (NSE:AMBICAAGAR) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, Ambica Agarbathies Aroma & Industries may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.9x, since almost half of all companies in India have P/E ratios greater than 22x and even P/E's higher than 48x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Ambica Agarbathies Aroma & Industries' financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Ambica Agarbathies Aroma & Industries

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

Is There Any Growth For Ambica Agarbathies Aroma & Industries?

Ambica Agarbathies Aroma & Industries' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 36%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Ambica Agarbathies Aroma & Industries is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Ambica Agarbathies Aroma & Industries' P/E

Despite Ambica Agarbathies Aroma & Industries' shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Ambica Agarbathies Aroma & Industries revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

Before you take the next step, you should know about the 3 warning signs for Ambica Agarbathies Aroma & Industries (2 can't be ignored!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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.

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