There Is A Reason Reliance Industries Limited's (NSE:RELIANCE) Price Is Undemanding

With a price-to-earnings (or "P/E") ratio of 24.3x Reliance Industries Limited (NSE:RELIANCE) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 56x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Reliance Industries could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

View our latest analysis for Reliance Industries

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

How Is Reliance Industries' Growth Trending?

In order to justify its P/E ratio, Reliance Industries would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 6.9% gain to the company's bottom line. The latest three year period has also seen an excellent 51% overall rise in EPS, aided somewhat 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.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the analysts watching the company. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Reliance Industries' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Reliance Industries' P/E?

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 Reliance Industries' 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Reliance Industries with six simple checks on some of these key factors.

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.