Caplin Point Laboratories Limited's (NSE:CAPLIPOINT) Low P/E No Reason For Excitement

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 31x, you may consider Caplin Point Laboratories Limited (NSE:CAPLIPOINT) as an attractive investment with its 23.8x 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.

Caplin Point Laboratories' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Is There Any Growth For Caplin Point Laboratories?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The strong recent performance means it was also able to grow EPS by 94% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 17% over the next year. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

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

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Caplin Point Laboratories maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Caplin Point Laboratories that we have uncovered.

If you're unsure about the strength of Caplin Point Laboratories' 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.