JSW Steel Limited (NSE:JSWSTEEL) Might Not Be As Mispriced As It Looks

It's not a stretch to say that JSW Steel Limited's (NSE:JSWSTEEL) price-to-earnings (or "P/E") ratio of 31.8x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 35x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

JSW Steel 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 moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

View our latest analysis for JSW Steel

Keen to find out how analysts think JSW Steel's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For JSW Steel?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 50% overall. 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 35% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we find it interesting that JSW Steel is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

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.

We've established that JSW Steel currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Plus, you should also learn about these 2 warning signs we've spotted with JSW Steel (including 1 which is potentially serious).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.