Potential Upside For Suraj Limited (NSE:SURAJLTD) Not Without Risk

It's not a stretch to say that Suraj Limited's (NSE:SURAJLTD) price-to-earnings (or "P/E") ratio of 32.1x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We'd have to say that with no tangible growth over the last year, Suraj's earnings have been unimpressive. It might be that many expect the uninspiring earnings performance to only match most other companies at best over the coming period, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Suraj

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

How Is Suraj's Growth Trending?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 1,249% overall rise in EPS, in spite of its uninspiring short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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 curious that Suraj's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Suraj's P/E?

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 Suraj revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

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

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.