Investors Aren't Entirely Convinced By SIL Investments Limited's (NSE:SILINV) Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may consider SIL Investments Limited (NSE:SILINV) as an attractive investment with its 15.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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As an illustration, earnings have deteriorated at SIL Investments over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for SIL Investments

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

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

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 5.3%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 94% 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.

It's interesting to note that the rest of the market is similarly expected to grow by 25% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that SIL Investments' P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Key Takeaway

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.

We've established that SIL Investments currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

Having said that, be aware SIL Investments is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on SIL Investments, 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.