Madhusudan Masala Limited's (NSE:MADHUSUDAN) Price Is Right But Growth Is Lacking

Madhusudan Masala Limited's (NSE:MADHUSUDAN) price-to-earnings (or "P/E") ratio of 29.1x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for Madhusudan Masala recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Madhusudan Masala

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

Is There Any Growth For Madhusudan Masala?

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

If we review the last year of earnings growth, the company posted a terrific increase of 29%. The strong recent performance means it was also able to grow EPS by 50% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Madhusudan Masala is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Madhusudan Masala's 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.

We've established that Madhusudan Masala maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Madhusudan Masala (2 are significant!) that we have uncovered.

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

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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.