Gujarat Raffia Industries Limited's (NSE:GUJRAFFIA) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 18.1x Gujarat Raffia Industries Limited (NSE:GUJRAFFIA) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

For example, consider that Gujarat Raffia Industries' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Gujarat Raffia Industries

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Gujarat Raffia Industries' earnings, revenue and cash flow.

Is There Enough Growth For Gujarat Raffia Industries?

There's an inherent assumption that a company should outperform the market for P/E ratios like Gujarat Raffia Industries' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 65%. As a result, earnings from three years ago have also fallen 63% 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 10% shows it's an unpleasant look.

In light of this, it's alarming that Gujarat Raffia Industries' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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 Gujarat Raffia Industries revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 4 warning signs for Gujarat Raffia Industries (1 is potentially serious!) that we have uncovered.

If you're unsure about the strength of Gujarat Raffia Industries' 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. 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.
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