When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 21x, you may consider India Pesticides Limited (NSE:IPL) as an attractive investment with its 17.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for India Pesticides as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.free report on India Pesticides.
Is There Any Growth For India Pesticides?
In order to justify its P/E ratio, India Pesticides would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Pleasingly, EPS has also lifted 249% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 18% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 22% growth forecast for the broader market.
With this information, we can see why India Pesticides is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On India Pesticides' 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 India Pesticides' 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 is also worth noting that we have found 2 warning signs for India Pesticides that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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.