There's No Escaping Century Extrusions Limited's (NSE:CENTEXT) Muted Earnings Despite A 26% Share Price Rise

Century Extrusions Limited (NSE:CENTEXT) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 37%.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Century Extrusions as an attractive investment with its 26.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Century Extrusions over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, 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.

Check out our latest analysis for Century Extrusions

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

How Is Century Extrusions' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. EPS has also lifted 19% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Century Extrusions' 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 Key Takeaway

Century Extrusions' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Century Extrusions maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Century Extrusions, and understanding should be part of your investment process.

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.