India Glycols Limited (NSE:INDIAGLYCO) Stock Catapults 25% Though Its Price And Business Still Lag The Market

India Glycols Limited (NSE:INDIAGLYCO) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 82% in the last year.

Although its price has surged higher, India Glycols' price-to-earnings (or "P/E") ratio of 21.7x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 62x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for India Glycols recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for India Glycols

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

What Are Growth Metrics Telling Us About The Low P/E?

India Glycols' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 8.2%. However, this wasn't enough as the latest three year period has seen an unpleasant 40% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

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 India Glycols' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

India Glycols' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of India Glycols 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with India Glycols (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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.