Investors Don't See Light At End Of BCL Industries Limited's (NSE:BCLIND) Tunnel

BCL Industries Limited's (NSE:BCLIND) price-to-earnings (or "P/E") ratio of 7.7x 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 19x and even P/E's above 43x are quite common. 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 example, consider that BCL Industries' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

See our latest analysis for BCL Industries

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

Is There Any Growth For BCL Industries?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.5%. Still, the latest three year period has seen an excellent 48% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 35% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why BCL Industries is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of BCL Industries revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - BCL Industries has 3 warning signs (and 1 which can't be ignored) we think you should know about.

You might be able to find a better investment than BCL Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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