It's A Story Of Risk Vs Reward With United Drilling Tools Limited (NSE:UNIDT)

With a price-to-earnings (or "P/E") ratio of 12.8x United Drilling Tools Limited (NSE:UNIDT) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 17x and even P/E's higher than 40x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

United Drilling Tools certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for United Drilling Tools

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on United Drilling Tools will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

United Drilling Tools' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. Pleasingly, EPS has also lifted 628% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that United Drilling Tools' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On United Drilling Tools' P/E

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 United Drilling Tools currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for United Drilling Tools you should be aware of.

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

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