Ashok Leyland Limited (NSE:ASHOKLEY) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may consider Ashok Leyland Limited (NSE:ASHOKLEY) as an attractive investment with its 24.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Ashok Leyland 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Ashok Leyland

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

Is There Any Growth For Ashok Leyland?

In order to justify its P/E ratio, Ashok Leyland would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% per year over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Ashok Leyland's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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.

As we suspected, our examination of Ashok Leyland's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Ashok Leyland (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.