Earnings Working Against National Aluminium Company Limited's (NSE:NATIONALUM) Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 30x, you may consider National Aluminium Company Limited (NSE:NATIONALUM) as a highly attractive investment with its 6.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, National Aluminium has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For National Aluminium?

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

Retrospectively, the last year delivered an exceptional 165% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 78% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 5.0% each year during the coming three years according to the nine analysts following the company. Meanwhile, the broader market is forecast to expand by 22% per year, which paints a poor picture.

In light of this, it's understandable that National Aluminium's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that National Aluminium maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

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

If you're unsure about the strength of National Aluminium's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.