Earnings Working Against REC Limited's (NSE:RECLTD) Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may consider REC Limited (NSE:RECLTD) as a highly attractive investment with its 5.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Recent earnings growth for REC has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for REC

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

What Are Growth Metrics Telling Us About The Low P/E?

REC's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. The latest three year period has also seen an excellent 66% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 5.9% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

With this information, we can see why REC is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On REC's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that REC maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for REC (1 is significant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on REC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.