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

Sarthak Metals Limited (NSE:SMLT) shareholders have had their patience rewarded with a 33% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

Although its price has surged higher, Sarthak Metals may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.4x, since almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 59x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Sarthak Metals' financial performance has been poor lately as its earnings have been in decline. 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.

View our latest analysis for Sarthak Metals

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sarthak Metals' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. 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. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

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 Bottom Line On Sarthak Metals' P/E

Sarthak Metals' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings 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. 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.

Before you settle on your opinion, we've discovered 4 warning signs for Sarthak Metals (1 is significant!) that you should be aware of.

If these risks are making you reconsider your opinion on Sarthak Metals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.