Goodluck India Limited (NSE:GOODLUCK) Stock's 26% Dive Might Signal An Opportunity But It Requires Some Scrutiny

To the annoyance of some shareholders, Goodluck India Limited (NSE:GOODLUCK) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.

After such a large drop in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 25x, you may consider Goodluck India as an attractive investment with its 13x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Goodluck India has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Goodluck India

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Goodluck India will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Goodluck India's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.8% last year. Pleasingly, EPS has also lifted 105% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 25% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Goodluck India's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Bottom Line On Goodluck India's P/E

The softening of Goodluck India's shares means its P/E is now sitting at a pretty low level. 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.

Our examination of Goodluck India revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Goodluck India (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Goodluck India. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.