Improved Earnings Required Before Mangalore Refinery and Petrochemicals Limited (NSE:MRPL) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 13x Mangalore Refinery and Petrochemicals Limited (NSE:MRPL) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 65x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Mangalore Refinery and Petrochemicals certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Mangalore Refinery and Petrochemicals

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Mangalore Refinery and Petrochemicals would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 179% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 27% over the next year. With the market predicted to deliver 25% growth , that's a disappointing outcome.

With this information, we are not surprised that Mangalore Refinery and Petrochemicals is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

We've established that Mangalore Refinery and Petrochemicals maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Mangalore Refinery and Petrochemicals (1 shouldn't be ignored!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.