Market Cool On Sharda Motor Industries Limited's (NSE:SHARDAMOTR) Earnings

With a price-to-earnings (or "P/E") ratio of 8.9x Sharda Motor Industries Limited (NSE:SHARDAMOTR) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 13x and even P/E's higher than 30x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Sharda Motor Industries' financial performance has been poor lately as it's earnings have been in decline. 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.

View our latest analysis for Sharda Motor Industries

How Does Sharda Motor Industries' P/E Ratio Compare To Its Industry Peers?

An inspection of average P/E's throughout Sharda Motor Industries' industry may help to explain its low P/E ratio. You'll notice in the figure below that P/E ratios in the Auto Components industry are higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Auto Components industry. 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 Sharda Motor Industries will help you shine a light on its historical performance.

Is There Any Growth For Sharda Motor Industries?

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

Retrospectively, the last year delivered a frustrating 45% 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 14% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 7.3% over the next year, even worse than the company's recent medium-term annualised earnings decline.

With this information, it's perhaps strange but not a major surprise that Sharda Motor Industries is trading at a lower P/E in comparison. Even if the company's recent growth rates continue outperforming the market, shrinking earnings are unlikely to lead to a stable P/E long-term. There is still 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

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 Sharda Motor Industries currently trades on a much lower than expected P/E since its recent three-year earnings is not as bad as the forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this more attractive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

Having said that, be aware Sharda Motor Industries is showing 3 warning signs in our investment analysis, and 1 of those is significant.

You might be able to find a better investment than Sharda Motor Industries. 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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