Improved Earnings Required Before Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) Shares Find Their Feet

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may consider Gujarat Narmada Valley Fertilizers & Chemicals Limited (NSE:GNFC) as an attractive investment with its 18.8x 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. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gujarat Narmada Valley Fertilizers & Chemicals will help you shine a light on its historical performance.

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

In order to justify its P/E ratio, Gujarat Narmada Valley Fertilizers & Chemicals would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 41% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% 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. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of Gujarat Narmada Valley Fertilizers & Chemicals revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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 moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Gujarat Narmada Valley Fertilizers & Chemicals, and understanding them should be part of your investment process.

You might be able to find a better investment than Gujarat Narmada Valley Fertilizers & Chemicals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.