Jindal Stainless Limited's (NSE:JSL) price-to-earnings (or "P/E") ratio of 19.3x 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 32x and even P/E's above 58x 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.
Recent earnings growth for Jindal Stainless has been in line with the market. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.
See our latest analysis for Jindal Stainless
How Is Jindal Stainless' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Jindal Stainless' 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 23% last year. The latest three year period has also seen an excellent 2,610% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 25% as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 24%, which is not materially different.
With this information, we find it odd that Jindal Stainless is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Jindal Stainless currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Jindal Stainless, and understanding should be part of your investment process.
If you're unsure about the strength of Jindal Stainless' 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.
About NSEI:JSL
Jindal Stainless
Manufactures and sells stainless-steel flat products in India and internationally.
Very undervalued with flawless balance sheet.
