JK Paper Limited's (NSE:JKPAPER) Price Is Right But Growth Is Lacking After Shares Rocket 26%

JK Paper Limited (NSE:JKPAPER) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may still consider JK Paper as a highly attractive investment with its 6.7x P/E ratio. 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.

JK Paper could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 JK Paper

Keen to find out how analysts think JK Paper's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/E ratio, JK Paper would need to produce anemic growth that's substantially trailing the market.

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 6.2%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 376% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 1.9% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

In light of this, it's understandable that JK Paper's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From JK Paper's P/E?

JK Paper's recent share price jump still sees its P/E sitting firmly flat on the ground. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that JK Paper maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for JK Paper that you need to be mindful of.

If you're unsure about the strength of JK Paper'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.