With a price-to-earnings (or "P/E") ratio of 3x Ashoka Buildcon Limited (NSE:ASHOKA) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 21x and even P/E's higher than 44x are not unusual. 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 quite advantageous for Ashoka Buildcon as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.free report on Ashoka Buildcon's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Ashoka Buildcon would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 160% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Ashoka Buildcon's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Ashoka Buildcon's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Ashoka Buildcon revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about these 3 warning signs we've spotted with Ashoka Buildcon (including 1 which is potentially serious).
If these risks are making you reconsider your opinion on Ashoka Buildcon, explore our interactive list of high quality stocks to get an idea of what else is out there.
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.