Benign Growth For Emami Paper Mills Limited (NSE:EMAMIPAP) Underpins Its Share Price

Emami Paper Mills Limited's (NSE:EMAMIPAP) price-to-earnings (or "P/E") ratio of 13.3x 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 27x and even P/E's above 52x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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We'd have to say that with no tangible growth over the last year, Emami Paper Mills' earnings have been unimpressive. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform the broader market in the near future. 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.

Check out our latest analysis for Emami Paper Mills

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Emami Paper Mills' earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 63% drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Emami Paper Mills' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Emami Paper Mills' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Emami Paper Mills revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Emami Paper Mills is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.