Stock Analysis

There's No Escaping Indian Oil Corporation Limited's (NSE:IOC) Muted Earnings

NSEI:IOC
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When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may consider Indian Oil Corporation Limited (NSE:IOC) as a highly attractive investment with its 4.8x 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.

Recent times have been advantageous for Indian Oil 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.

See our latest analysis for Indian Oil

pe-multiple-vs-industry
NSEI:IOC Price to Earnings Ratio vs Industry December 29th 2023
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Indian Oil.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 236% gain to the company's bottom line. The latest three year period has also seen an excellent 1,124% 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 analysts covering the company suggest earnings growth is heading into negative territory, declining 17% each year over the next three years. With the market predicted to deliver 19% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Indian Oil's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

As we suspected, our examination of Indian Oil's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Indian Oil (1 is significant) 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.

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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.