With a price-to-earnings (or “P/E”) ratio of 54.3x Whirlpool of India Limited (NSE:WHIRLPOOL) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 13x 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.
Earnings have risen firmly for Whirlpool of India recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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.free report on Whirlpool of India’s earnings, revenue and cash flow.
Is There Enough Growth For Whirlpool of India?
The only time you’d be truly comfortable seeing a P/E as steep as Whirlpool of India’s is when the company’s growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 20% gain to the company’s bottom line. The strong recent performance means it was also able to grow EPS by 58% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 1.4% over the next year, materially lower than the company’s recent medium-term annualised growth rates.
With this information, we can see why Whirlpool of India is trading at such a high P/E compared to the market. Presumably shareholders aren’t keen to offload something they believe will continue to outmanoeuvre the bourse.
The Final Word
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
As we suspected, our examination of Whirlpool of India revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it’s hard to see the share price falling strongly in the near future under these circumstances.
Having said that, be aware Whirlpool of India is showing 1 warning sign in our investment analysis, you should know about.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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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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