The Market Doesn't Like What It Sees From Dr. Reddy's Laboratories Limited's (NSE:DRREDDY) Earnings Yet

Dr. Reddy's Laboratories Limited's (NSE:DRREDDY) price-to-earnings (or "P/E") ratio of 20.5x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 35x and even P/E's above 67x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times haven't been advantageous for Dr. Reddy's Laboratories as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre 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.

Check out our latest analysis for Dr. Reddy's Laboratories

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dr. Reddy's Laboratories.

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

Dr. Reddy's 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 17% last year. The strong recent performance means it was also able to grow EPS by 223% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 3.0% per year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 21% per annum, which paints a poor picture.

With this information, we are not surprised that Dr. Reddy's Laboratories is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Dr. Reddy's Laboratories' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Dr. Reddy's Laboratories maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Dr. Reddy's Laboratories you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

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