Investor Optimism Abounds SORIL Infra Resources Limited (NSE:SORILINFRA) But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 15x, you may consider SORIL Infra Resources Limited (NSE:SORILINFRA) as a stock to avoid entirely with its 37.1x 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.

For instance, SORIL Infra Resources' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, SORIL Infra Resources would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 56%. This means it has also seen a slide in earnings over the longer-term as EPS is down 82% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 9.8% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that SORIL Infra Resources is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

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.

Our examination of SORIL Infra Resources revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with SORIL Infra Resources (at least 2 which shouldn't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of SORIL Infra Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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