Improved Earnings Required Before NLC India Limited (NSE:NLCINDIA) Shares Find Their Feet

NLC India Limited's (NSE:NLCINDIA) price-to-earnings (or "P/E") ratio of 11.8x 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 30x and even P/E's above 56x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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NLC India certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for NLC India

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

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

The only time you'd be truly comfortable seeing a P/E as depressed as NLC India's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 140% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 0.4% over the next year. With the market predicted to deliver 23% growth , that's a disappointing outcome.

In light of this, it's understandable that NLC India's P/E would sit below the majority of other companies. 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.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that NLC India 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.

It is also worth noting that we have found 2 warning signs for NLC India that you need to take into consideration.

If you're unsure about the strength of NLC 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.