NTPC Limited's (NSE:NTPC) Price Is Right But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 34x, you may consider NTPC Limited (NSE:NTPC) as an attractive investment with its 18.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

NTPC's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

Check out our latest analysis for NTPC

If you'd like to see what analysts are forecasting going forward, you should check out our free report on NTPC.

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 NTPC's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. Pleasingly, EPS has also lifted 43% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 2.7% each year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 21% per annum growth forecast for the broader market.

With this information, we can see why NTPC is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

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.

As we suspected, our examination of NTPC's analyst forecasts revealed that its inferior earnings outlook 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.

Having said that, be aware NTPC is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

Of course, you might also be able to find a better stock than NTPC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.