Why Investors Shouldn't Be Surprised By Piramal Enterprises Limited's (NSE:PEL) Low P/E

With a price-to-earnings (or "P/E") ratio of 4.9x Piramal Enterprises Limited (NSE:PEL) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 60x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

While the market has experienced earnings growth lately, Piramal Enterprises' 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.

See our latest analysis for Piramal Enterprises

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

How Is Piramal Enterprises' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 19% per annum during the coming three years according to the seven analysts following the company. With the market predicted to deliver 19% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Piramal Enterprises 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 Piramal Enterprises' 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Piramal Enterprises (at least 2 which are a bit unpleasant), and understanding these should be part of your investment process.

You might be able to find a better investment than Piramal Enterprises. 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.