Improved Earnings Required Before PNC Infratech Limited (NSE:PNCINFRA) Stock's 27% Jump Looks Justified

PNC Infratech Limited (NSE:PNCINFRA) shareholders have had their patience rewarded with a 27% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may still consider PNC Infratech as a highly attractive investment with its 9.9x 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 so limited.

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PNC Infratech hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for PNC Infratech

Keen to find out how analysts think PNC Infratech'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?

In order to justify its P/E ratio, PNC Infratech would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 41% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 0.6% per year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 21% each year, which paints a poor picture.

With this information, we are not surprised that PNC Infratech is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Shares in PNC Infratech are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 PNC Infratech's analyst forecasts revealed that its outlook for shrinking earnings 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.

Having said that, be aware PNC Infratech is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of PNC Infratech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.