Earnings Working Against Oil India Limited's (NSE:OIL) Share Price

Oil India Limited's (NSE:OIL) price-to-earnings (or "P/E") ratio of 9.3x 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 28x and even P/E's above 53x 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.

Our free stock report includes 1 warning sign investors should be aware of before investing in Oil India. Read for free now.

Recent times have been advantageous for Oil India as its earnings have been rising faster than most other companies. 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.

Check out our latest analysis for Oil India

Keen to find out how analysts think Oil India's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Oil India?

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

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 66% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 3.1% over the next year. With the market predicted to deliver 23% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Oil India's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Oil India's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Oil India maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Oil India is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Oil India's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.