Menon Bearings Limited's (NSE:MENONBE) Risks Elevated At These Prices

Menon Bearings Limited's (NSE:MENONBE) price-to-earnings (or "P/E") ratio of 16.6x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Menon Bearings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Menon Bearings

Although there are no analyst estimates available for Menon Bearings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Menon Bearings?

Menon Bearings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 43%. The last three years don't look nice either as the company has shrunk EPS by 25% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 6.5% shows the market is more attractive on an annualised basis regardless.

With this information, it's strange that Menon Bearings is trading at a higher P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Bottom Line On Menon Bearings' P/E

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.

We've established that Menon Bearings currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Menon Bearings is showing 4 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Menon Bearings. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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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