Improved Earnings Required Before Aditya Ultra Steel Limited (NSE:AUSL) Stock's 36% Jump Looks Justified

Aditya Ultra Steel Limited (NSE:AUSL) shares have continued their recent momentum with a 36% gain in the last month alone. 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.

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 30x, you may still consider Aditya Ultra Steel as a highly attractive investment with its 11.2x 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.

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For example, consider that Aditya Ultra Steel's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.

See our latest analysis for Aditya Ultra Steel

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

Is There Any Growth For Aditya Ultra Steel?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Aditya Ultra Steel's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.7%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Aditya Ultra Steel'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 Final Word

Shares in Aditya Ultra Steel are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Aditya Ultra Steel 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Aditya Ultra Steel has 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

If you're unsure about the strength of Aditya Ultra Steel's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.