Lacklustre Performance Is Driving Amara Raja Energy & Mobility Limited's (NSE:ARE&M) Low P/E

Amara Raja Energy & Mobility Limited's (NSE:ARE&M) price-to-earnings (or "P/E") ratio of 24.6x 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 34x and even P/E's above 65x 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 limited.

Recent earnings growth for Amara Raja Energy & Mobility has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Amara Raja Energy & Mobility

Keen to find out how analysts think Amara Raja Energy & Mobility's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Amara Raja Energy & Mobility?

In order to justify its P/E ratio, Amara Raja Energy & Mobility would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. The latest three year period has also seen a 30% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% per annum over the next three years. That's shaping up to be materially lower than the 21% per annum growth forecast for the broader market.

With this information, we can see why Amara Raja Energy & Mobility 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 Bottom Line On Amara Raja Energy & Mobility's P/E

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 Amara Raja Energy & Mobility 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 Amara Raja Energy & Mobility that you need to take into consideration.

You might be able to find a better investment than Amara Raja Energy & Mobility. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.