Earnings Working Against Meghmani Organics Limited's (NSE:MOL) Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 21x, you may consider Meghmani Organics Limited (NSE:MOL) as an attractive investment with its 10.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen firmly for Meghmani Organics recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform 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.

See our latest analysis for Meghmani Organics

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 Meghmani Organics' earnings, revenue and cash flow.

How Is Meghmani Organics' Growth Trending?

Meghmani Organics' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 5.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Meghmani Organics' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Meghmani Organics' P/E

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.

As we suspected, our examination of Meghmani Organics revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Meghmani Organics you should be aware of.

You might be able to find a better investment than Meghmani Organics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.