Alpa Laboratories Limited (NSE:ALPA) Looks Inexpensive But Perhaps Not Attractive Enough

With a price-to-earnings (or "P/E") ratio of 12.8x Alpa Laboratories Limited (NSE:ALPA) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 33x and even P/E's higher than 63x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

The earnings growth achieved at Alpa Laboratories over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Alpa Laboratories

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Alpa Laboratories will help you shine a light on its historical performance.

How Is Alpa Laboratories' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Alpa Laboratories' is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. The latest three year period has also seen an excellent 50% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Alpa Laboratories is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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 Alpa Laboratories maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Alpa Laboratories (1 is a bit concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Alpa Laboratories. 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).

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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.