DCM Shriram Industries Limited's (NSE:DCMSRIND) 68% Dip In Price Shows Sentiment Is Matching Earnings
The DCM Shriram Industries Limited (NSE:DCMSRIND) share price has fared very poorly over the last month, falling by a substantial 68%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 70% loss during that time.
Since its price has dipped substantially, DCM Shriram Industries' price-to-earnings (or "P/E") ratio of 7.8x 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 26x and even P/E's above 50x 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.
For instance, DCM Shriram Industries' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Check out our latest analysis for DCM Shriram Industries
Is There Any Growth For DCM Shriram Industries?
DCM Shriram Industries' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 50%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 5.6% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that DCM Shriram Industries' 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.
What We Can Learn From DCM Shriram Industries' P/E?
DCM Shriram Industries' 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.
As we suspected, our examination of DCM Shriram Industries 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 4 warning signs for DCM Shriram Industries (1 is a bit unpleasant!) that you need to take into consideration.
You might be able to find a better investment than DCM Shriram Industries. 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.