Welspun Corp Limited (NSE:WELCORP) Shares Fly 30% But Investors Aren't Buying For Growth

Welspun Corp Limited (NSE:WELCORP) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The annual gain comes to 113% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Welspun may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.4x, since almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 67x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Welspun as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

View our latest analysis for Welspun

Keen to find out how analysts think Welspun's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Welspun's Growth Trending?

Welspun's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 437% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 42% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 10% as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to expand by 25%, which paints a poor picture.

With this information, we are not surprised that Welspun is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Welspun's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Welspun's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Welspun that you should be aware of.

Of course, you might also be able to find a better stock than Welspun. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com