Improved Earnings Required Before Tide Water Oil Co. (India) Limited (NSE:TIDEWATER) Stock's 28% Jump Looks Justified

Despite an already strong run, Tide Water Oil Co. (India) Limited (NSE:TIDEWATER) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 85% 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 32x, you may still consider Tide Water Oil (India) as an attractive investment with its 24x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The recent earnings growth at Tide Water Oil (India) would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform 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.

Check out our latest analysis for Tide Water Oil (India)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Tide Water Oil (India) will help you shine a light on its historical performance.

How Is Tide Water Oil (India)'s Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Tide Water Oil (India)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 3.8%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

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

In light of this, it's understandable that Tide Water Oil (India)'s 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.

The Bottom Line On Tide Water Oil (India)'s P/E

Despite Tide Water Oil (India)'s shares building up a head of steam, its P/E still lags 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.

We've established that Tide Water Oil (India) 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Tide Water Oil (India) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.