Indian Phosphate Limited (NSE:IPHL) Stock's 29% Dive Might Signal An Opportunity But It Requires Some Scrutiny

To the annoyance of some shareholders, Indian Phosphate Limited (NSE:IPHL) shares are down a considerable 29% in the last month, which continues a horrid run for the company. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

After such a large drop in price, Indian Phosphate may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.9x, since almost half of all companies in India have P/E ratios greater than 25x and even P/E's higher than 48x 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 so limited.

For instance, Indian Phosphate's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you 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.

Check out our latest analysis for Indian Phosphate

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 Indian Phosphate's earnings, revenue and cash flow.

How Is Indian Phosphate's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. Even so, admirably EPS has lifted 87% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 25% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Indian Phosphate's P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Bottom Line On Indian Phosphate's P/E

Indian Phosphate's P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Indian Phosphate currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Having said that, be aware Indian Phosphate is showing 3 warning signs in our investment analysis, and 2 of those are significant.

If you're unsure about the strength of Indian Phosphate's 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.