Amara Raja Energy & Mobility Limited's (NSE:ARE&M) Prospects Need A Boost To Lift Shares

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may consider Amara Raja Energy & Mobility Limited (NSE:ARE&M) as an attractive investment with its 20.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Amara Raja Energy & Mobility could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Is There Any Growth For Amara Raja Energy & Mobility?

The only time you'd be truly comfortable seeing a P/E as low as Amara Raja Energy & Mobility's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. The latest three year period has also seen an excellent 41% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 9.8% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

In light of this, it's understandable that Amara Raja Energy & Mobility's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Amara Raja Energy & Mobility's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Amara Raja Energy & Mobility that you should be aware of.

If these risks are making you reconsider your opinion on Amara Raja Energy & Mobility, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.