Investors Still Aren't Entirely Convinced By Sarthak Metals Limited's (NSE:SMLT) Earnings Despite 33% Price Jump

The Sarthak Metals Limited (NSE:SMLT) share price has done very well over the last month, posting an excellent gain of 33%. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

In spite of the firm bounce in price, Sarthak Metals' price-to-earnings (or "P/E") ratio of 17.4x 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 59x 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 Sarthak Metals over the last year, which is not ideal at all. 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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Sarthak Metals

Although there are no analyst estimates available for Sarthak Metals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sarthak Metals' Growth Trending?

In order to justify its P/E ratio, Sarthak Metals 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 23%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 453% 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.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Sarthak Metals' 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 Final Word

The latest share price surge wasn't enough to lift Sarthak Metals' P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. 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. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Sarthak Metals (1 is potentially serious!) that you need to be mindful of.

If you're unsure about the strength of Sarthak Metals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.