Investors Give Sarthak Metals Limited (NSE:SMLT) Shares A 26% Hiding

Sarthak Metals Limited (NSE:SMLT) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 47%, which is great even in a bull market.

Even after such a large drop in price, Sarthak Metals' price-to-earnings (or "P/E") ratio of 19.7x 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 31x and even P/E's above 57x 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.

For instance, Sarthak Metals' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

See our latest analysis for Sarthak Metals

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

How Is Sarthak Metals' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Sarthak Metals' is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 169% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Sarthak Metals is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Sarthak Metals' P/E

Sarthak Metals' recently weak share price has pulled its P/E below most other companies. 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.

Our examination of Sarthak Metals 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. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You need to take note of risks, for example - Sarthak Metals has 3 warning signs (and 1 which is concerning) we think you should know about.

Of course, you might also be able to find a better stock than Sarthak Metals. 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.