Lacklustre Performance Is Driving GAIL (India) Limited's (NSE:GAIL) Low P/E

GAIL (India) Limited's (NSE:GAIL) price-to-earnings (or "P/E") ratio of 10.6x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 31x and even P/E's above 58x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, GAIL (India) has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 119% last year. As a result, it also grew EPS by 25% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 0.2% per year over the next three years. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that GAIL (India)'s P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From GAIL (India)'s P/E?

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 GAIL (India) 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 GAIL (India) that we have uncovered.

If you're unsure about the strength of GAIL (India)'s 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.