Jindal Stainless Limited's (NSE:JSL) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 34.6x Jindal Stainless Limited (NSE:JSL) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 14x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Jindal Stainless has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Jindal Stainless

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Does Growth Match The High P/E?

Jindal Stainless' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 36% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings growth is heading into negative territory, declining 236% over the next year. Meanwhile, the broader market is forecast to expand by 9.6%, which paints a poor picture.

With this information, we find it concerning that Jindal Stainless is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

What We Can Learn From Jindal Stainless' P/E?

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.

We've established that Jindal Stainless currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Jindal Stainless (1 is significant!) that you need to be mindful of.

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