Gujarat Narmada Valley Fertilizers & Chemicals Limited's (NSE:GNFC) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may consider Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) as an attractive investment with its 21.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For example, consider that Gujarat Narmada Valley Fertilizers & Chemicals' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, 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.

View our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

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

How Is Gujarat Narmada Valley Fertilizers & Chemicals' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Gujarat Narmada Valley Fertilizers & Chemicals' to be considered reasonable.

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 66%. This means it has also seen a slide in earnings over the longer-term as EPS is down 25% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Gujarat Narmada Valley Fertilizers & Chemicals' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Gujarat Narmada Valley Fertilizers & Chemicals maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Gujarat Narmada Valley Fertilizers & Chemicals that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com