Mangalore Refinery and Petrochemicals Limited's (NSE:MRPL) Share Price Boosted 32% But Its Business Prospects Need A Lift Too

Despite an already strong run, Mangalore Refinery and Petrochemicals Limited (NSE:MRPL) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 193% in the last year.

Even after such a large jump in price, Mangalore Refinery and Petrochemicals' price-to-earnings (or "P/E") ratio of 6.9x might still 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 32x and even P/E's above 60x 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.

Recent earnings growth for Mangalore Refinery and Petrochemicals has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Mangalore Refinery and Petrochemicals

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Mangalore Refinery and Petrochemicals' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 45% 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. 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.

The Key Takeaway

Shares in Mangalore Refinery and Petrochemicals are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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.

Plus, you should also learn about these 3 warning signs we've spotted with Mangalore Refinery and Petrochemicals (including 1 which can't be ignored).

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.