Why Investors Shouldn't Be Surprised By Kirloskar Industries Limited's (NSE:KIRLOSIND) Low P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 34x, you may consider Kirloskar Industries Limited (NSE:KIRLOSIND) as an attractive investment with its 28.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Kirloskar Industries' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

View our latest analysis for Kirloskar Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kirloskar Industries will help you shine a light on its historical performance.

How Is Kirloskar Industries' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Kirloskar Industries is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Kirloskar Industries maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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 the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Kirloskar Industries with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.