Little Excitement Around UFO Moviez India Limited's (NSE:UFO) Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 13x, you may consider UFO Moviez India Limited (NSE:UFO) as a highly attractive investment with its 5.3x 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.

For instance, UFO Moviez India's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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 UFO Moviez India

How Does UFO Moviez India's P/E Ratio Compare To Its Industry Peers?

An inspection of average P/E's throughout UFO Moviez India's industry may help to explain its particularly low P/E ratio. It turns out the Entertainment industry in general has a P/E ratio higher than the market, as the graphic below shows. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Some industry P/E's don't move around a lot and right now most companies within the Entertainment industry should be getting a boost. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on UFO Moviez India will help you shine a light on its historical performance.

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

UFO Moviez India's 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.

Retrospectively, the last year delivered a frustrating 42% 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 38% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 7.3% shows the market is more attractive on an annualised basis regardless.

In light of this, it's understandable that UFO Moviez India's P/E sits below the majority of other companies. Nonetheless, with earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Key Takeaway

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 UFO Moviez India revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with UFO Moviez India.

You might be able to find a better investment than UFO Moviez India. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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