What You Can Learn From Mahindra EPC Irrigation Limited's (NSE:MAHEPC) P/E

With a price-to-earnings (or "P/E") ratio of 22x Mahindra EPC Irrigation Limited (NSE:MAHEPC) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 12x and even P/E's lower than 6x 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.

Mahindra EPC Irrigation certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mahindra EPC Irrigation

Where Does Mahindra EPC Irrigation's P/E Sit Within Its Industry?

An inspection of average P/E's throughout Mahindra EPC Irrigation's industry may help to explain its particularly high P/E ratio. The image below shows that the Machinery industry as a whole has a P/E ratio similar to the market. So we'd say there is little merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Machinery industry's current setting, most of its constituents' P/E's would be expected to be held back. However, what is happening on the company's own income statement is the most important factor to its P/E.

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 Mahindra EPC Irrigation's earnings, revenue and cash flow.

How Is Mahindra EPC Irrigation's Growth Trending?

Mahindra EPC Irrigation's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 103%. Pleasingly, EPS has also lifted 132% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.8% shows it's a great look while it lasts.

With this information, we can see why Mahindra EPC Irrigation is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.

What We Can Learn From Mahindra EPC Irrigation's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Mahindra EPC Irrigation maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling 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. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Mahindra EPC Irrigation that you should be aware of.

If you're unsure about the strength of Mahindra EPC Irrigation's 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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