Investors Don't See Light At End Of NATCO Pharma Limited's (NSE:NATCOPHARM) Tunnel

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may consider NATCO Pharma Limited (NSE:NATCOPHARM) as a highly attractive investment with its 8.9x 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.

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NATCO Pharma could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for NATCO Pharma

Keen to find out how analysts think NATCO Pharma's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a decent 3.7% gain to the company's bottom line. Pleasingly, EPS has also lifted 316% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 24% per annum during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 19% growth each year, that's a disappointing outcome.

In light of this, it's understandable that NATCO Pharma's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of NATCO Pharma's analyst forecasts revealed that its outlook for shrinking earnings 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.

Before you take the next step, you should know about the 2 warning signs for NATCO Pharma (1 is concerning!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.