Dhanuka Agritech Limited's (NSE:DHANUKA) Business And Shares Still Trailing The Market

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may consider Dhanuka Agritech Limited (NSE:DHANUKA) as an attractive investment with its 21.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Dhanuka Agritech could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 13%. EPS has also lifted 27% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 8.7% during the coming year according to the eight analysts following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

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

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Dhanuka Agritech's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You always need to take note of risks, for example - Dhanuka Agritech has 1 warning sign we think you should be aware of.

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

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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.