Why Investors Shouldn't Be Surprised By Parag Milk Foods Limited's (NSE:PARAGMILK) Low P/E

With a price-to-earnings (or "P/E") ratio of 25.4x Parag Milk Foods Limited (NSE:PARAGMILK) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Parag Milk Foods as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Parag Milk Foods

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

Is There Any Growth For Parag Milk Foods?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 19% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially lower than the 22% each year growth forecast for the broader market.

In light of this, it's understandable that Parag Milk Foods' 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.

The Bottom Line On Parag Milk Foods' 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 Parag Milk Foods maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Parag Milk Foods is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If you're unsure about the strength of Parag Milk Foods' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.