Stock Analysis

Steel Authority of India Limited's (NSE:SAIL) Share Price Boosted 31% But Its Business Prospects Need A Lift Too

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Steel Authority of India Limited (NSE:SAIL) shareholders have had their patience rewarded with a 31% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Steel Authority of India as an attractive investment with its 20.7x 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.

Steel Authority of India could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Steel Authority of India

NSEI:SAIL Price to Earnings Ratio vs Industry April 13th 2024
Keen to find out how analysts think Steel Authority of India's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Steel Authority of India's Growth Trending?

In order to justify its P/E ratio, Steel Authority of India would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 6.4% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% over the next year. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

In light of this, it's understandable that Steel Authority of India's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Steel Authority of India's P/E close to the market median. 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 Steel Authority of India's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 2 warning signs for Steel Authority of India that you need to take into consideration.

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

Valuation is complex, but we're helping make it simple.

Find out whether Steel Authority of India is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.