NMDC Limited (NSE:NMDC) Surges 30% Yet Its Low P/E Is No Reason For Excitement

NMDC Limited (NSE:NMDC) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The annual gain comes to 138% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, NMDC may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 11.7x, since almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 60x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for NMDC as its earnings have been rising faster 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.

View our latest analysis for NMDC

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

How Is NMDC's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 79% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 0.7% during the coming year according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 24%, which paints a poor picture.

In light of this, it's understandable that NMDC's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

NMDC's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of NMDC'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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with NMDC, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than NMDC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.