Finolex Cables Limited's (NSE:FINCABLES) Business And Shares Still Trailing The Market
With a price-to-earnings (or "P/E") ratio of 18x Finolex Cables Limited (NSE:FINCABLES) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 50x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
While the market has experienced earnings growth lately, Finolex Cables' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for Finolex Cables
How Is Finolex Cables' Growth Trending?
In order to justify its P/E ratio, Finolex Cables would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 22% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 6.8% per annum over the next three years. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.
In light of this, it's understandable that Finolex Cables' 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.
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 Finolex Cables' 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. It's hard to see the share price rising strongly in the near future under these circumstances.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Finolex Cables that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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