Barak Valley Cements Limited (NSE:BVCL) Held Back By Insufficient Growth Even After Shares Climb 28%

Barak Valley Cements Limited (NSE:BVCL) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 27% in the last twelve months.

In spite of the firm bounce in price, Barak Valley Cements' price-to-earnings (or "P/E") ratio of 20.6x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 31x and even P/E's above 58x are quite common. 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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For example, consider that Barak Valley Cements' financial performance has been poor lately as its 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. 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 Barak Valley Cements

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Barak Valley Cements' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. 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. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Barak Valley Cements 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.

What We Can Learn From Barak Valley Cements' P/E?

The latest share price surge wasn't enough to lift Barak Valley Cements' P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Barak Valley Cements 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 2 warning signs we've spotted with Barak Valley Cements.

If these risks are making you reconsider your opinion on Barak Valley Cements, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.