National Aluminium Company Limited's (NSE:NATIONALUM) Price Is Right But Growth Is Lacking After Shares Rocket 26%

National Aluminium Company Limited (NSE:NATIONALUM) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last month tops off a massive increase of 137% in the last year.

Even after such a large jump in price, National Aluminium's price-to-earnings (or "P/E") ratio of 18.4x 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 35x and even P/E's above 66x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

National Aluminium certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

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Keen to find out how analysts think National Aluminium'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, National Aluminium would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 39% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 15% per annum over the next three years. With the market predicted to deliver 21% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why National Aluminium is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift National Aluminium's P/E close to the market median. 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 National Aluminium 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.

It is also worth noting that we have found 1 warning sign for National Aluminium that you need to take into consideration.

If you're unsure about the strength of National Aluminium'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.