When close to half the companies in India have price-to-earnings ratios (or “P/E’s”) below 16x, you may consider Central Depository Services (India) Limited (NSE:CDSL) as a stock to avoid entirely with its 39.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
Central Depository Services (India) certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.free report on Central Depository Services (India).
Does Growth Match The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Central Depository Services (India)’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 4.8%. This was backed up an excellent period prior to see EPS up by 34% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 18% as estimated by the three analysts watching the company. With the market only predicted to deliver 11%, the company is positioned for a stronger earnings result.
In light of this, it’s understandable that Central Depository Services (India)’s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Central Depository Services (India)’s P/E
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 Central Depository Services (India) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we’ve discovered 2 warning signs for Central Depository Services (India) 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 P/E below 20x.
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This article by Simply Wall St is general in nature. 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.
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