Investors Aren't Entirely Convinced By Godawari Power & Ispat Limited's (NSE:GPIL) Earnings

Godawari Power & Ispat Limited's (NSE:GPIL) price-to-earnings (or "P/E") ratio of 15.3x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 35x and even P/E's above 67x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Godawari Power & Ispat's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

Godawari Power & Ispat'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.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The latest three year period has also seen an excellent 55% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the one analyst watching the company. With the market only predicted to deliver 22% per year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Godawari Power & Ispat is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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 Godawari Power & Ispat's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Godawari Power & Ispat.

If you're unsure about the strength of Godawari Power & Ispat'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.

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