Mazagon Dock Shipbuilders Limited's (NSE:MAZDOCK) price-to-earnings (or "P/E") ratio of 13.3x 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 19x and even P/E's above 42x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at Mazagon Dock Shipbuilders over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.free report on Mazagon Dock Shipbuilders' earnings, revenue and cash flow.
How Is Mazagon Dock Shipbuilders' Growth Trending?
In order to justify its P/E ratio, Mazagon Dock Shipbuilders would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. The last three years don't look nice either as the company has shrunk EPS by 21% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 30% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we are not surprised that Mazagon Dock Shipbuilders is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
What We Can Learn From Mazagon Dock Shipbuilders' P/E?
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 Mazagon Dock Shipbuilders revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Mazagon Dock Shipbuilders (of which 1 makes us a bit uncomfortable!) you should know about.
If these risks are making you reconsider your opinion on Mazagon Dock Shipbuilders, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. 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.
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