Rajshree Polypack Limited's (NSE:RPPL) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may consider Rajshree Polypack Limited (NSE:RPPL) as a highly attractive investment with its 10.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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The earnings growth achieved at Rajshree Polypack over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Rajshree Polypack

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Rajshree Polypack's earnings, revenue and cash flow.

How Is Rajshree Polypack's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 12% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Rajshree Polypack's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

As we suspected, our examination of Rajshree Polypack revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Rajshree Polypack you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on Rajshree Polypack, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.