Omaxe Limited's (NSE:OMAXE) Price Is Out Of Tune With Earnings

Omaxe Limited's (NSE:OMAXE) price-to-earnings (or "P/E") ratio of 36.9x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

As an illustration, earnings have deteriorated at Omaxe over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Omaxe

Does Omaxe Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Omaxe's industry may help to explain its particularly high P/E ratio. It turns out the Real Estate industry in general has a P/E ratio similar to the market, as the graphic below shows. So unfortunately this doesn't provide a lot to explain the company's ratio right now. In the context of the Real Estate industry's current setting, most of its constituents' P/E's would be expected to be held back. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Omaxe's earnings, revenue and cash flow.

Is There Enough Growth For Omaxe?

Omaxe's 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 5.4% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 59% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 6.7% shows the market is more attractive on an annualised basis regardless.

In light of this, it's odd that Omaxe's P/E sits above the majority of other companies. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Omaxe's 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.

Our examination of Omaxe revealed its sharp three-year contraction in earnings isn't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to shrink less severely. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. Unless the company's relative performance improves markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Omaxe (1 can't be ignored!) that we have uncovered.

You might be able to find a better investment than Omaxe. 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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