Savita Oil Technologies Limited's (NSE:SOTL) Price Is Right But Growth Is Lacking After Shares Rocket 35%

Despite an already strong run, Savita Oil Technologies Limited (NSE:SOTL) shares have been powering on, with a gain of 35% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 31x, you may still consider Savita Oil Technologies as an attractive investment with its 18.2x P/E ratio. 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 Savita Oil Technologies' financial performance has been poor lately as its earnings have been in decline. 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.

Check out our latest analysis for Savita Oil Technologies

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

Is There Any Growth For Savita Oil Technologies?

Savita Oil Technologies' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 19%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 40% 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 24% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Savita Oil Technologies' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Savita Oil Technologies' P/E?

Despite Savita Oil Technologies' shares building up a head of steam, its P/E still lags most other companies. 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.

We've established that Savita Oil Technologies maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Savita Oil Technologies has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Savita Oil Technologies' 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.