Finolex Industries Limited (NSE:FINPIPE) Shares Fly 30% But Investors Aren't Buying For Growth

The Finolex Industries Limited (NSE:FINPIPE) share price has done very well over the last month, posting an excellent gain of 30%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

Even after such a large jump in price, Finolex Industries may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.3x, since almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 53x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Finolex Industries has been doing relatively well. It might be that many expect the strong 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.

See our latest analysis for Finolex Industries

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

Is There Any Growth For Finolex Industries?

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

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 24% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 1.7% each year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Finolex Industries is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Finolex Industries' 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.

As we suspected, our examination of Finolex Industries' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Finolex Industries (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.