Positive Sentiment Still Eludes Everest Kanto Cylinder Limited (NSE:EKC) Following 27% Share Price Slump

Everest Kanto Cylinder Limited (NSE:EKC) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 22% in the last year.

Even after such a large drop in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Everest Kanto Cylinder as a highly attractive investment with its 15.7x 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.

Everest Kanto Cylinder certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Everest Kanto Cylinder

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Everest Kanto Cylinder.

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

Everest Kanto Cylinder's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 75%. However, this wasn't enough as the latest three year period has seen a very unpleasant 40% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 42% over the next year. With the market only predicted to deliver 26%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Everest Kanto Cylinder's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Shares in Everest Kanto Cylinder have plummeted and its P/E is now low enough to touch the ground. 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.

We've established that Everest Kanto Cylinder currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Everest Kanto Cylinder, and understanding them should be part of your investment process.

If you're unsure about the strength of Everest Kanto Cylinder'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.