Deepak Fertilisers And Petrochemicals Corporation Limited (NSE:DEEPAKFERT) Stock Catapults 27% Though Its Price And Business Still Lag The Market

Deepak Fertilisers And Petrochemicals Corporation Limited (NSE:DEEPAKFERT) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 75% in the last year.

In spite of the firm bounce in price, Deepak Fertilisers And Petrochemicals' price-to-earnings (or "P/E") ratio of 23x 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 35x and even P/E's above 66x 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.

While the market has experienced earnings growth lately, Deepak Fertilisers And Petrochemicals' earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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 Deepak Fertilisers And Petrochemicals

Keen to find out how analysts think Deepak Fertilisers And Petrochemicals' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Deepak Fertilisers And Petrochemicals 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 41%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 18% per year during the coming three years according to the dual analysts following the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Deepak Fertilisers And Petrochemicals' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Deepak Fertilisers And Petrochemicals' P/E?

The latest share price surge wasn't enough to lift Deepak Fertilisers And Petrochemicals' P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Deepak Fertilisers And Petrochemicals maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Deepak Fertilisers And Petrochemicals (1 shouldn't be ignored!) that you need to take into consideration.

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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