Ramdevbaba Solvent Limited's (NSE:RBS) Prospects Need A Boost To Lift Shares

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 34x, you may consider Ramdevbaba Solvent Limited (NSE:RBS) as a highly attractive investment with its 15.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Ramdevbaba Solvent's receding earnings in recent times would have to be some food for thought. 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 Ramdevbaba Solvent

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Ramdevbaba Solvent would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 9.0% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% in total over the last three years. 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 deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Ramdevbaba Solvent's P/E sits below the majority of other companies. 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 Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Ramdevbaba Solvent 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Ramdevbaba Solvent has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, you might also be able to find a better stock than Ramdevbaba Solvent. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com