Selan Exploration Technology Limited (NSE:SELAN) Might Not Be As Mispriced As It Looks

With a price-to-earnings (or "P/E") ratio of 5x Selan Exploration Technology Limited (NSE:SELAN) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 13x and even P/E's higher than 30x 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 so limited.

For instance, Selan Exploration Technology's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Selan Exploration Technology

Where Does Selan Exploration Technology's P/E Sit Within Its Industry?

It's plausible that Selan Exploration Technology's particularly low P/E ratio could be a result of tendencies within its own industry. The image below shows that the Oil and Gas industry as a whole has a P/E ratio higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Oil and Gas industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

Although there are no analyst estimates available for Selan Exploration Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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 Selan Exploration Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 340% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to shrink 7.3% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we find it very odd that Selan Exploration Technology is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader market.

The Bottom Line On Selan Exploration Technology's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Selan Exploration Technology revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. We think potential risks might be placing significant pressure on the P/E ratio and share price. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 4 warning signs for Selan Exploration Technology you should be aware of.

If these risks are making you reconsider your opinion on Selan Exploration Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. 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.
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