Market Cool On SP Refractories Limited's (NSE:SPRL) Earnings Pushing Shares 26% Lower

Unfortunately for some shareholders, the SP Refractories Limited (NSE:SPRL) share price has dived 26% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 89%, which is great even in a bull market.

Since its price has dipped substantially, SP Refractories' price-to-earnings (or "P/E") ratio of 22x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 35x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, SP Refractories has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for SP Refractories

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 SP Refractories' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as SP Refractories' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 153% gain to the company's bottom line. Pleasingly, EPS has also lifted 94% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 26% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that SP Refractories is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.

What We Can Learn From SP Refractories' P/E?

SP Refractories' recently weak share price has pulled its P/E below most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that SP Refractories currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 3 warning signs for SP Refractories (1 is a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on SP Refractories, 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.