Star Paper Mills Limited (NSE:STARPAPER) Might Not Be As Mispriced As It Looks

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 31x, you may consider Star Paper Mills Limited (NSE:STARPAPER) as a highly attractive investment with its 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.

For example, consider that Star Paper Mills' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Star Paper Mills

Although there are no analyst estimates available for Star Paper Mills, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 10%. Still, the latest three year period has seen an excellent 110% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

It's interesting to note that the rest of the market is similarly expected to grow by 26% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Star Paper Mills' P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Bottom Line On Star Paper Mills' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Star Paper Mills currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Star Paper Mills that you need to be mindful of.

Of course, you might also be able to find a better stock than Star Paper Mills. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.