Nelco Limited (NSE:NELCO) Not Flying Under The Radar

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 13x, you may consider Nelco Limited (NSE:NELCO) as a stock to avoid entirely with its 36.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that Nelco's financial performance has been poor lately as it's earnings have been in decline. 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.

See our latest analysis for Nelco

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nelco's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 41% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 98% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 3.1% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Nelco's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

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.

We've established that Nelco maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Nelco (1 doesn't sit too well with us!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Nelco. 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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