Investors Appear Satisfied With S H Kelkar and Company Limited's (NSE:SHK) Prospects

With a price-to-earnings (or "P/E") ratio of 36.8x S H Kelkar and Company Limited (NSE:SHK) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 16x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

S H Kelkar has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for S H Kelkar

Keen to find out how analysts think S H Kelkar's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For S H Kelkar?

The only time you'd be truly comfortable seeing a P/E as steep as S H Kelkar's is when the company's growth is on track to outshine the market decidedly.

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 62%. As a result, earnings from three years ago have also fallen 67% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 139% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

In light of this, it's understandable that S H Kelkar'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 Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that S H Kelkar maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for S H Kelkar that 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 P/E ratio below 20x).

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