Vardhman Special Steels Limited's (NSE:VSSL) Share Price Boosted 31% But Its Business Prospects Need A Lift Too

Vardhman Special Steels Limited (NSE:VSSL) shares have continued their recent momentum with a 31% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 43%.

Although its price has surged higher, Vardhman Special Steels may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 26.5x, 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. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Vardhman Special Steels could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

View our latest analysis for Vardhman Special Steels

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Vardhman Special Steels.

How Is Vardhman Special Steels' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.0%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 106% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 14% as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

With this information, we can see why Vardhman Special Steels is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Vardhman Special Steels' P/E

The latest share price surge wasn't enough to lift Vardhman Special Steels' P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Vardhman Special Steels maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Vardhman Special Steels that you should be aware of.

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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