Benign Growth For Kansai Nerolac Paints Limited (NSE:KANSAINER) Underpins Its Share Price

With a price-to-earnings (or "P/E") ratio of 16.7x Kansai Nerolac Paints Limited (NSE:KANSAINER) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Kansai Nerolac Paints 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.

Check out our latest analysis for Kansai Nerolac Paints

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kansai Nerolac Paints.

How Is Kansai Nerolac Paints' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 67%. Pleasingly, EPS has also lifted 183% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 9.5% per annum over the next three years. With the market predicted to deliver 19% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Kansai Nerolac Paints is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Kansai Nerolac Paints' P/E?

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 Kansai Nerolac Paints maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Kansai Nerolac Paints (1 is potentially serious!) 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 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.