Ashapura Minechem Limited's (NSE:ASHAPURMIN) Shares Bounce 26% But Its Business Still Trails The Market

The Ashapura Minechem Limited (NSE:ASHAPURMIN) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 224% in the last year.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Ashapura Minechem as a highly attractive investment with its 14.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Ashapura Minechem certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Ashapura Minechem

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 Ashapura Minechem's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Ashapura Minechem's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 190% gain to the company's bottom line. Still, incredibly EPS has fallen 42% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

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 Ashapura Minechem'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. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Even after such a strong price move, Ashapura Minechem's P/E still trails the rest of the market significantly. 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 Ashapura Minechem revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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 moving strongly in either direction in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Ashapura Minechem 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 low P/E).

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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.