Improved Earnings Required Before Ashapura Minechem Limited (NSE:ASHAPURMIN) Stock's 26% Jump Looks Justified

Despite an already strong run, Ashapura Minechem Limited (NSE:ASHAPURMIN) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 20% 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 32x, you may still consider Ashapura Minechem as an attractive investment with its 21.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at Ashapura Minechem over the last year, which is not ideal at all. 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. 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 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.

Is There Any Growth For Ashapura Minechem?

In order to justify its P/E ratio, Ashapura Minechem would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.2%. Still, the latest three year period has seen an excellent 33% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Ashapura Minechem's P/E sits below the majority of other companies. 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 Bottom Line On Ashapura Minechem's P/E

Ashapura Minechem's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Ashapura Minechem 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.

Plus, you should also learn about these 3 warning signs we've spotted with Ashapura Minechem.

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.