Improved Earnings Required Before Jindal Steel & Power Limited (NSE:JINDALSTEL) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 17.4x Jindal Steel & Power Limited (NSE:JINDALSTEL) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 67x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Jindal Steel & Power has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Jindal Steel & Power

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Jindal Steel & Power's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 91%. However, this wasn't enough as the latest three year period has seen a very unpleasant 3.5% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the analysts watching the company. With the market predicted to deliver 22% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Jindal Steel & Power 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 Key Takeaway

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 Jindal Steel & Power's 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Jindal Steel & Power is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Jindal Steel & Power's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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