Force Motors Limited’s share price increased by 27%. Yet, its business prospects need a lift

The share price of Force Motors Limited has risen by an impressive 27% in the previous month. Taking a broader view, while not as robust as last month, the 18% year-to-date increase is also appropriate. Despite the firm’s price rebound, considering that almost half of Indian firms have price-to-earnings ratios (or “P/E’s”) more than 26x, Force Motors may still be an excellent buy with its 22x P/E ratio. Nonetheless, we’d need to see whether there’s a legitimate explanation for the lower P/E. Force Motors has been performing well lately, with earnings expanding steadily. One reason is that the P/E is low because investors believe solid profit growth will shortly underperform the overall market. If it does not happen, current shareholders have cause to be hopeful about the future direction of the share price.

Will Growth Match the Low P/E?

The only time you’d feel entirely comfortable with a P/E ratio as low as Force Motors is if the company’s growth is expected to trail the market. Looking back, we notice that the company’s profits per share increased by an impressive 28% last year. Still, EPS has scarcely increased from three years ago, which is not ideal. As a result, the company’s profit growth in recent years has been erratic. Compared to the market, which is expected to increase by 25% over the next 12 months, the company’s momentum is lower, according to recent medium-term annualized earnings figures. This information explains why Force Motors sells at a lower P/E ratio than the market. Many stockholders felt uncomfortable hanging onto something they think will continue to trail the market.

Even though Force Motors’ shares are gaining traction, their P/E ratio remains lower than most other corporations. The price-to-earnings ratio is more valuable as a reflection of present investor mood and future expectations than a valuation tool. We have shown that Force Motors retains its low P/E ratio based on its recent three-year growth, which is lower than the overall market prediction. Shareholders tolerate the low P/E ratio because they understand that future profits will likely be disappointing. If present medium-term profit patterns continue, it is difficult to imagine the share price growing sharply shortly under these conditions.