Lacklustre Performance Is Driving Gujarat State Fertilizers & Chemicals Limited's (NSE:GSFC) Low P/E

With a price-to-earnings (or "P/E") ratio of 15.5x Gujarat State Fertilizers & Chemicals Limited (NSE:GSFC) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 63x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Gujarat State Fertilizers & Chemicals' receding earnings in recent times would have to be some food for thought. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Gujarat State Fertilizers & Chemicals

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

Does Growth Match The Low P/E?

Gujarat State Fertilizers & Chemicals' 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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. As a result, earnings from three years ago have also fallen 3.1% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's understandable that Gujarat State 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Gujarat State Fertilizers & Chemicals' P/E?

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.

As we suspected, our examination of Gujarat State Fertilizers & Chemicals revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Gujarat State Fertilizers & Chemicals that you need to be mindful of.

Of course, you might also be able to find a better stock than Gujarat State Fertilizers & Chemicals. 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.