Take Care Before Jumping Onto HP Adhesives Limited (NSE:HPAL) Even Though It's 28% Cheaper

To the annoyance of some shareholders, HP Adhesives Limited (NSE:HPAL) shares are down a considerable 28% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 54% share price decline.

Although its price has dipped substantially, HP Adhesives' price-to-earnings (or "P/E") ratio of 21.2x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 25x and even P/E's above 48x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

HP Adhesives has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

View our latest analysis for HP Adhesives

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 HP Adhesives' earnings, revenue and cash flow.

Is There Any Growth For HP Adhesives?

HP Adhesives' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.7% last year. The latest three year period has also seen an excellent 96% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 25% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that HP Adhesives' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Key Takeaway

The softening of HP Adhesives' shares means its P/E is now sitting at a pretty low level. 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 HP Adhesives currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

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

You might be able to find a better investment than HP Adhesives. 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.