Investors Don't See Light At End Of National Aluminium Company Limited's (NSE:NATIONALUM) Tunnel And Push Stock Down 26%

National Aluminium Company Limited (NSE:NATIONALUM) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 19% share price drop.

In spite of the heavy fall in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may still consider National Aluminium as a highly attractive investment with its 6.3x 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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

With earnings growth that's superior to most other companies of late, National Aluminium has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for National Aluminium

If you'd like to see what analysts are forecasting going forward, you should check out our free report on National Aluminium .

Is There Any Growth For National Aluminium?

There's an inherent assumption that a company should far underperform the market for P/E ratios like National Aluminium's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 182% gain to the company's bottom line. The latest three year period has also seen an excellent 47% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings growth is heading into negative territory, declining 6.9% over the next year. Meanwhile, the broader market is forecast to expand by 25%, which paints a poor picture.

In light of this, it's understandable that National Aluminium's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

National Aluminium's P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of National Aluminium's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for National Aluminium (1 can't be ignored!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.