Zenith Steel Pipes & Industries Limited's (NSE:ZENITHSTL) Price Is Right But Growth Is Lacking After Shares Rocket 159%

Despite an already strong run, Zenith Steel Pipes & Industries Limited (NSE:ZENITHSTL) shares have been powering on, with a gain of 159% in the last thirty days. The last 30 days were the cherry on top of the stock's 1,005% gain in the last year, which is nothing short of spectacular.

Even after such a large jump in price, Zenith Steel Pipes & Industries may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.3x, since almost half of all companies in India have P/E ratios greater than 21x and even P/E's higher than 45x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Zenith Steel Pipes & Industries certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Zenith Steel Pipes & Industries

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zenith Steel Pipes & Industries' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Zenith Steel Pipes & Industries' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 324% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Zenith Steel Pipes & Industries' 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.

What We Can Learn From Zenith Steel Pipes & Industries' P/E?

The latest share price surge wasn't enough to lift Zenith Steel Pipes & Industries' P/E close to the market median. 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.

As we suspected, our examination of Zenith Steel Pipes & Industries revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.

Having said that, be aware Zenith Steel Pipes & Industries is showing 5 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.