Samvardhana Motherson International Limited (NSE:MOTHERSON) Looks Inexpensive But Perhaps Not Attractive Enough

Samvardhana Motherson International Limited's (NSE:MOTHERSON) price-to-earnings (or "P/E") ratio of 26.9x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 32x and even P/E's above 61x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Samvardhana Motherson International certainly has been doing a good job lately as it's been growing earnings more 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.

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

Samvardhana Motherson International's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 98% gain to the company's bottom line. The latest three year period has also seen an excellent 71% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Samvardhana Motherson International is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Samvardhana Motherson International maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Samvardhana Motherson International that you need to take into consideration.

If you're unsure about the strength of Samvardhana Motherson International's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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