Indian Metals and Ferro Alloys Limited (NSE:IMFA) Shares Fly 26% But Investors Aren't Buying For Growth

Indian Metals and Ferro Alloys Limited (NSE:IMFA) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 62%.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 31x, you may still consider Indian Metals and Ferro Alloys as a highly attractive investment with its 10.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been quite advantageous for Indian Metals and Ferro Alloys as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Indian Metals and Ferro Alloys

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

Is There Any Growth For Indian Metals and Ferro Alloys?

The only time you'd be truly comfortable seeing a P/E as depressed as Indian Metals and Ferro Alloys' is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. As a result, it also grew EPS by 27% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Indian Metals and Ferro Alloys' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Indian Metals and Ferro Alloys' P/E?

Even after such a strong price move, Indian Metals and Ferro Alloys' P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Indian Metals and Ferro Alloys maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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 rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Indian Metals and Ferro Alloys that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.