Why Investors Shouldn't Be Surprised By DC Infotech and Communication Limited's (NSE:DCI) Low P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 18x, you may consider DC Infotech and Communication Limited (NSE:DCI) as an attractive investment with its 13.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

DC Infotech and Communication certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong 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 DC Infotech and Communication

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, DC Infotech and Communication would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 83% gain to the company's bottom line. As a result, it also grew EPS by 18% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that DC Infotech and Communication's 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 Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that DC Infotech and Communication maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, 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. If recent medium-term earnings trends continue, 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 4 warning signs for DC Infotech and Communication (3 shouldn't be ignored!) that we have uncovered.

Of course, you might also be able to find a better stock than DC Infotech and Communication. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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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