Earnings Not Telling The Story For Universus Photo Imagings Limited (NSE:UNIVPHOTO) After Shares Rise 31%

Despite an already strong run, Universus Photo Imagings Limited (NSE:UNIVPHOTO) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 212% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Universus Photo Imagings' price-to-earnings (or "P/E") ratio of 22.6x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 22x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

As an illustration, earnings have deteriorated at Universus Photo Imagings over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Universus Photo Imagings

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

What Are Growth Metrics Telling Us About The P/E?

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

Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 27% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it interesting that Universus Photo Imagings is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Universus Photo Imagings' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Universus Photo Imagings currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Universus Photo Imagings that you should be aware of.

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

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