Nirman Agri Genetics Limited (NSE:NIRMAN) Stock's 28% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Nirman Agri Genetics Limited (NSE:NIRMAN) shares have had a horrible month, losing 28% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.1% over the last twelve months.

After such a large drop in price, Nirman Agri Genetics' price-to-earnings (or "P/E") ratio of 8x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 29x and even P/E's above 55x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been quite advantageous for Nirman Agri Genetics as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 Nirman Agri Genetics

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

Is There Any Growth For Nirman Agri Genetics?

The only time you'd be truly comfortable seeing a P/E as depressed as Nirman Agri Genetics' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. The latest three year period has also seen an excellent 261% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

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

With this information, we find it odd that Nirman Agri Genetics is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Nirman Agri Genetics' P/E?

Nirman Agri Genetics' P/E looks about as weak as its stock price lately. 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.

We've established that Nirman Agri Genetics currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Nirman Agri Genetics is showing 3 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Nirman Agri Genetics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.