Bharat Petroleum Corporation Limited’s (NSE:BPCL) price-to-earnings (or “P/E”) ratio of 10.8x 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 57x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so limited.
While the market has experienced earnings growth lately, Bharat Petroleum’s 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.
Check out our latest analysis for Bharat Petroleum
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There’s an inherent assumption that a company should far underperform the market for P/E ratios like Bharat Petroleum’s to be considered reasonable.
Retrospectively, the last year delivered a frustrating 50% decrease to the company’s bottom line. Regardless, EPS has managed to lift by a handy 12% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 12% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 22% growth per year, the company is positioned for a weaker earnings result.
With this information, we can see why Bharat Petroleum 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 Key Takeaway
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that Bharat Petroleum 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You always need to take note of risks, for example – Bharat Petroleum has 3 warning signs we think you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
Discover if Bharat Petroleum might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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