Renaissance Global Limited's (NSE:RGL) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 21.6x Renaissance Global Limited (NSE:RGL) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 29x and even P/E's higher than 55x 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.

We'd have to say that with no tangible growth over the last year, Renaissance Global's earnings have been unimpressive. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform 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.

Check out our latest analysis for Renaissance Global

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Renaissance Global's earnings, revenue and cash flow.

How Is Renaissance Global's Growth Trending?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 30% decline in EPS over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

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 Renaissance Global's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

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.

As we suspected, our examination of Renaissance Global revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Renaissance Global with six simple checks.

Of course, you might also be able to find a better stock than Renaissance Global. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.