Oil India Limited's (NSE:OIL) Shares Lagging The Market But So Is The Business

Oil India Limited's (NSE:OIL) price-to-earnings (or "P/E") ratio of 8.2x 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 30x and even P/E's above 56x 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.

Oil India certainly has been doing a good job lately as it's been growing earnings more 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.

View 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.

How Is Oil India's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 43%. The latest three year period has also seen an excellent 84% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 4.0% per annum over the next three years. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.

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.

The Final Word

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.

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

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Oil India 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.

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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.