HOV Services Limited (NSE:HOVS) Held Back By Insufficient Growth Even After Shares Climb 27%

HOV Services Limited (NSE:HOVS) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.7% in the last twelve months.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may still consider HOV Services as an attractive investment with its 20.9x 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.

We've discovered 3 warning signs about HOV Services. View them for free.

HOV Services certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 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.

Check out our latest analysis for HOV Services

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 HOV Services' earnings, revenue and cash flow.

Is There Any Growth For HOV Services?

The only time you'd be truly comfortable seeing a P/E as low as HOV Services' is when the company's growth is on track to lag 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 9.5% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that HOV Services' 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 HOV Services' P/E

Despite HOV Services' shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of HOV Services 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 HOV Services is showing 3 warning signs in our investment analysis, and 1 of those is significant.

If you're unsure about the strength of HOV Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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