Lacklustre Performance Is Driving Inspire Films Limited's (NSE:INSPIRE) 30% Price Drop

Inspire Films Limited (NSE:INSPIRE) shares have had a horrible month, losing 30% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Since its price has dipped substantially, Inspire Films may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.9x, since almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 61x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Inspire Films' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Inspire Films

Although there are no analyst estimates available for Inspire Films, 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 Low P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. 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 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Inspire Films' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Inspire Films' P/E

The softening of Inspire Films' shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Inspire Films 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 4 warning signs for Inspire Films you should be aware of, and 3 of them can't be ignored.

Of course, you might also be able to find a better stock than Inspire Films. 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.