Benign Growth For Kirloskar Oil Engines Limited (NSE:KIRLOSENG) Underpins Its Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may consider Kirloskar Oil Engines Limited (NSE:KIRLOSENG) as an attractive investment with its 23.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Kirloskar Oil Engines as its earnings have been rising faster 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.

View our latest analysis for Kirloskar Oil Engines

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kirloskar Oil Engines.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Kirloskar Oil Engines' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. The latest three year period has also seen an excellent 139% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the four analysts following the company. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Kirloskar Oil Engines is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Kirloskar Oil Engines' P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Kirloskar Oil Engines' 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.

You need to take note of risks, for example - Kirloskar Oil Engines has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.