Why Investors Shouldn't Be Surprised By Libas Consumer Products Limited's (NSE:LIBAS) Low P/E

Libas Consumer Products Limited's (NSE:LIBAS) price-to-earnings (or "P/E") ratio of 5.4x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 51x 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 so limited.

With earnings growth that's exceedingly strong of late, Libas Consumer Products has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Libas Consumer Products

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Libas Consumer Products will help you shine a light on its historical performance.

How Is Libas Consumer Products' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Libas Consumer Products' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 143% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 60% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 26% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Libas Consumer Products' P/E would sit below the majority of other companies. 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 Libas Consumer Products' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Libas Consumer Products 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. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Libas Consumer Products (1 makes us a bit uncomfortable!) that you need to be mindful of.

You might be able to find a better investment than Libas Consumer Products. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.