Uflex Limited (NSE:UFLEX) Screens Well But There Might Be A Catch

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 13x, you may consider Uflex Limited (NSE:UFLEX) as a highly attractive investment with its 4.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for Uflex as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Uflex

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

An inspection of average P/E's throughout Uflex's industry may help to explain its particularly low P/E ratio. It turns out the Packaging industry in general also has a P/E ratio lower than the market, as the graphic below shows. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Packaging industry's current setting, most of its constituents' P/E's would be expected to be toned down. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.

Want the full picture on analyst estimates for the company? Then our free report on Uflex will help you uncover what's on the horizon.

Is There Any Growth For Uflex?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Uflex's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. As a result, it also grew EPS by 6.1% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to remain buoyant, climbing by 10% during the coming year according to the one analyst following the company. Meanwhile, the broader market is forecast to contract by 7.3%, which would indicate the company is doing very well.

With this information, we find it very odd that Uflex 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.

The Key Takeaway

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.

We've established that Uflex currently trades on a much lower than expected P/E its growth forecasts are potentially beating a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader market turmoil. So, the risk of a price drop looks to be subdued, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Uflex has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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