Improved Earnings Required Before Isgec Heavy Engineering Limited (NSE:ISGEC) Shares Find Their Feet

Isgec Heavy Engineering Limited's (NSE:ISGEC) price-to-earnings (or "P/E") ratio of 25.6x 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 29x and even P/E's above 55x 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.

Isgec Heavy Engineering certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Isgec Heavy Engineering

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Isgec Heavy Engineering's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 75% last year. As a result, it also grew EPS by 30% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 1.0% during the coming year according to the only analyst following the company. Meanwhile, the broader market is forecast to expand by 24%, which paints a poor picture.

With this information, we are not surprised that Isgec Heavy Engineering is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Isgec Heavy Engineering's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Isgec Heavy Engineering's analyst forecasts revealed that its outlook for shrinking earnings 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Isgec Heavy Engineering you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.