Munjal Showa Limited's (NSE:MUNJALSHOW) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 28.4x Munjal Showa Limited (NSE:MUNJALSHOW) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 14x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Munjal Showa's 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.

View our latest analysis for Munjal Showa

Although there are no analyst estimates available for Munjal Showa, 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 Munjal Showa?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Munjal Showa's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 69%. This means it has also seen a slide in earnings over the longer-term as EPS is down 68% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 9.6% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Munjal Showa's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On Munjal Showa's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Munjal Showa 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Munjal Showa is showing 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

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