Aditya Birla Capital Limited's (NSE:ABCAPITAL) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 12.1x Aditya Birla Capital Limited (NSE:ABCAPITAL) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 33x and even P/E's higher than 62x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Aditya Birla Capital's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Aditya Birla Capital

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aditya Birla Capital.

Is There Any Growth For Aditya Birla Capital?

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

Retrospectively, the last year delivered a frustrating 32% 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 158% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader market.

In light of this, it's understandable that Aditya Birla Capital's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Aditya Birla Capital's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Aditya Birla Capital (1 makes us a bit uncomfortable!) that we have uncovered.

Of course, you might also be able to find a better stock than Aditya Birla Capital. 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.