Improved Earnings Required Before Hindustan Petroleum Corporation Limited (NSE:HINDPETRO) Shares Find Their Feet

Hindustan Petroleum Corporation Limited's (NSE:HINDPETRO) price-to-earnings (or "P/E") ratio of 7.4x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 52x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

With earnings growth that's superior to most other companies of late, Hindustan Petroleum has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Hindustan Petroleum

Want the full picture on analyst estimates for the company? Then our free report on Hindustan Petroleum will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 232% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 5.4% per annum over the next three years. That's not great when the rest of the market is expected to grow by 19% per year.

In light of this, it's understandable that Hindustan Petroleum's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Hindustan Petroleum's P/E?

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.

We've established that Hindustan Petroleum maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Hindustan Petroleum (1 can't be ignored!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.