There's No Escaping N R Agarwal Industries Limited's (NSE:NRAIL) Muted Earnings Despite A 25% Share Price Rise

N R Agarwal Industries Limited (NSE:NRAIL) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The annual gain comes to 112% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, N R Agarwal Industries may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.3x, since almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 58x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, N R Agarwal Industries has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 N R Agarwal Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on N R Agarwal Industries will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, N R Agarwal Industries would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 32%. The strong recent performance means it was also able to grow EPS by 53% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why N R Agarwal Industries is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Shares in N R Agarwal Industries are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 N R Agarwal Industries maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for N R Agarwal Industries that you need to take into consideration.

Of course, you might also be able to find a better stock than N R Agarwal Industries. 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.