Improved Earnings Required Before Hindalco Industries Limited (NSE:HINDALCO) Shares Find Their Feet

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may consider Hindalco Industries Limited (NSE:HINDALCO) as a highly attractive investment with its 13.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Hindalco Industries certainly has been doing a good job lately as it's been growing earnings more 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Hindalco Industries

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hindalco Industries.

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

Hindalco Industries' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. EPS has also lifted 20% in aggregate from three years ago, mostly 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 9.2% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Hindalco Industries' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Hindalco Industries' P/E

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 Hindalco Industries' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hindalco Industries, and understanding these should be part of your investment process.

You might be able to find a better investment than Hindalco Industries. 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.