Potential Upside For UGRO Capital Limited (NSE:UGROCAP) Not Without Risk

UGRO Capital Limited's (NSE:UGROCAP) price-to-earnings (or "P/E") ratio of 15.5x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 31x and even P/E's above 59x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for UGRO Capital as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for UGRO Capital

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, UGRO Capital would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. The latest three year period has also seen an excellent 667% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 19% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 20% per annum, which is not materially different.

With this information, we find it odd that UGRO Capital is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of UGRO Capital's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook 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 these conditions should normally provide more support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for UGRO Capital that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.