A Piece Of The Puzzle Missing From Rama Phosphates Limited's (NSE:RAMAPHO) 28% Share Price Climb

Rama Phosphates Limited (NSE:RAMAPHO) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, Rama Phosphates may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.2x, since almost half of all companies in India have P/E ratios greater than 23x and even P/E's higher than 47x 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.

Rama Phosphates has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Rama Phosphates

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Rama Phosphates 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, Rama Phosphates 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 17%. The latest three year period has also seen an excellent 236% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Rama Phosphates' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Rama Phosphates' 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.

Our examination of Rama Phosphates revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Rama Phosphates (of which 1 is potentially serious!) you should know about.

Of course, you might also be able to find a better stock than Rama Phosphates. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.