Insufficient Growth At Gujarat Industries Power Company Limited (NSE:GIPCL) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 11.9x Gujarat Industries Power Company Limited (NSE:GIPCL) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 49x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Gujarat Industries Power's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 Gujarat Industries Power

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Gujarat Industries Power would need to produce anemic growth that's substantially trailing the market.

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 14%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.3% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 15% as estimated by the one analyst watching the company. With the market predicted to deliver 25% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Gujarat Industries Power's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Gujarat Industries Power's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Gujarat Industries Power (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Gujarat Industries Power, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.