Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) Held Back By Insufficient Growth Even After Shares Climb 26%

Despite an already strong run, Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 58%.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Gujarat State Fertilizers & Chemicals as a highly attractive investment with its 8.8x 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 so limited.

While the market has experienced earnings growth lately, Gujarat State Fertilizers & Chemicals' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Gujarat State Fertilizers & Chemicals' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 407% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.1% per year during the coming three years according to the one analyst following the company. That's not great when the rest of the market is expected to grow by 19% each year.

With this information, we are not surprised that Gujarat State Fertilizers & Chemicals is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Even after such a strong price move, Gujarat State Fertilizers & Chemicals' P/E still trails the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Gujarat State Fertilizers & Chemicals maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Gujarat State Fertilizers & Chemicals has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're unsure about the strength of Gujarat State Fertilizers & Chemicals' 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.