Why Investors Shouldn't Be Surprised By Insecticides (India) Limited's (NSE:INSECTICID) Low P/E

Insecticides (India) Limited's (NSE:INSECTICID) price-to-earnings (or "P/E") ratio of 19.4x might 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 33x and even P/E's above 63x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Insecticides (India) 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 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.

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Is There Any Growth For Insecticides (India)?

The only time you'd be truly comfortable seeing a P/E as low as Insecticides (India)'s is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. EPS has also lifted 14% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 11% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

In light of this, it's understandable that Insecticides (India)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Insecticides (India)'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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Insecticides (India) that you need to be mindful of.

If these risks are making you reconsider your opinion on Insecticides (India), 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.

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