Lacklustre Performance Is Driving Patel Engineering Limited's (NSE:PATELENG) Low P/E

With a price-to-earnings (or "P/E") ratio of 17.6x Patel Engineering Limited (NSE:PATELENG) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 61x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Patel Engineering could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

Check out our latest analysis for Patel Engineering

Keen to find out how analysts think Patel 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 Patel Engineering's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.1% gain to the company's bottom line. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 12% as estimated by the one analyst watching the company. With the market predicted to deliver 25% growth , that's a disappointing outcome.

In light of this, it's understandable that Patel Engineering's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

We've established that Patel Engineering maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Patel Engineering (1 is significant) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.