Further Upside For Sarda Energy & Minerals Limited (NSE:SARDAEN) Shares Could Introduce Price Risks After 28% Bounce

Sarda Energy & Minerals Limited (NSE:SARDAEN) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The annual gain comes to 130% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Sarda Energy & Minerals' price-to-earnings (or "P/E") ratio of 17x 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 32x and even P/E's above 60x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Sarda Energy & Minerals over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Sarda Energy & Minerals

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sarda Energy & Minerals' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Sarda Energy & Minerals would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 176% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Sarda Energy & Minerals' 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

Sarda Energy & Minerals' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Sarda Energy & Minerals currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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.

It is also worth noting that we have found 1 warning sign for Sarda Energy & Minerals that you need to take into consideration.

You might be able to find a better investment than Sarda Energy & Minerals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.