The Market Doesn't Like What It Sees From Madras Fertilizers Limited's (NSE:MADRASFERT) Earnings Yet

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may consider Madras Fertilizers Limited (NSE:MADRASFERT) as an attractive investment with its 17.5x 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 instance, Madras Fertilizers' receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for Madras Fertilizers

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Madras Fertilizers' earnings, revenue and cash flow.

How Is Madras Fertilizers' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.3%. Even so, admirably EPS has lifted 30% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Madras Fertilizers is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Madras Fertilizers' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Madras Fertilizers 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Madras Fertilizers is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

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.