Worth Peripherals Limited's (NSE:WORTH) Price Is Right But Growth Is Lacking After Shares Rocket 42%

Worth Peripherals Limited (NSE:WORTH) shares have had a really impressive month, gaining 42% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 56%.

In spite of the firm bounce in price, Worth Peripherals' price-to-earnings (or "P/E") ratio of 17.3x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 62x are quite common. 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 Worth Peripherals 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.

View our latest analysis for Worth Peripherals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Worth Peripherals will help you shine a light on its historical performance.

How Is Worth Peripherals' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Worth Peripherals' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a worthy increase of 4.3%. EPS has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Worth Peripherals is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Worth Peripherals' P/E?

The latest share price surge wasn't enough to lift Worth Peripherals' 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 Worth Peripherals 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Worth Peripherals (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Worth Peripherals. 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.