Eldeco Housing and Industries Limited (NSE:ELDEHSG) Looks Inexpensive But Perhaps Not Attractive Enough

Eldeco Housing and Industries Limited's (NSE:ELDEHSG) price-to-earnings (or "P/E") ratio of 10.7x 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 21x and even P/E's above 43x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Eldeco Housing and Industries over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Eldeco Housing and Industries

Although there are no analyst estimates available for Eldeco Housing and Industries, 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 underperform the market for P/E ratios like Eldeco Housing and Industries' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 8.9%. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Eldeco Housing and Industries' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

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.

As we suspected, our examination of Eldeco Housing and Industries revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 2 warning signs for Eldeco Housing and Industries you should be aware of.

If you're unsure about the strength of Eldeco Housing and Industries' 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.