Aarey Drugs & Pharmaceuticals Limited (NSE:AAREYDRUGS) Shares Fly 25% But Investors Aren't Buying For Growth

The Aarey Drugs & Pharmaceuticals Limited (NSE:AAREYDRUGS) share price has done very well over the last month, posting an excellent gain of 25%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") above 21x, you may still consider Aarey Drugs & Pharmaceuticals as an attractive investment with its 13x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Aarey Drugs & Pharmaceuticals 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.

Check out our latest analysis for Aarey Drugs & Pharmaceuticals

Although there are no analyst estimates available for Aarey Drugs & Pharmaceuticals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Aarey Drugs & Pharmaceuticals?

Aarey Drugs & Pharmaceuticals' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. The latest three year period has also seen a 21% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Aarey Drugs & Pharmaceuticals 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 Aarey Drugs & Pharmaceuticals' P/E?

Despite Aarey Drugs & Pharmaceuticals' shares building up a head of steam, its P/E still lags most other companies. 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 Aarey Drugs & Pharmaceuticals 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Aarey Drugs & Pharmaceuticals you should know about.

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 P/E 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.