It's A Story Of Risk Vs Reward With Agarwal Industrial Corporation Limited (NSE:AGARIND)

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 13x, you may consider Agarwal Industrial Corporation Limited (NSE:AGARIND) as a highly attractive investment with its 3.3x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Agarwal Industrial has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Agarwal Industrial

Keen to find out how analysts think Agarwal Industrial's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Agarwal Industrial's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 89% last year. Pleasingly, EPS has also lifted 134% 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.

Shifting to the future, estimates from the one analyst covering the company suggest earnings growth will be highly resilient over the next year growing by 0.8%. With the rest of the market predicted to shrink by 6.7%, that would be a fantastic result.

With this information, we find it very odd that Agarwal Industrial is trading at a P/E lower than the market. It looks like most investors aren't convinced at all that the company can achieve positive future growth in the face of a shrinking broader market.

What We Can Learn From Agarwal Industrial's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Agarwal Industrial's analyst forecasts revealed that its superior earnings outlook against a shaky market isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a superior earnings outlook with some actual growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. So, the risk of a price drop looks to be subdued, but investors seem to think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 4 warning signs for Agarwal Industrial that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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