Why Investors Shouldn't Be Surprised By Maharashtra Scooters Ltd.'s (NSE:MAHSCOOTER) P/E

Maharashtra Scooters Ltd.'s (NSE:MAHSCOOTER) price-to-earnings (or "P/E") ratio of 20.6x might make it look like a strong 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Maharashtra Scooters certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong 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.

View our latest analysis for Maharashtra Scooters

Where Does Maharashtra Scooters' P/E Sit Within Its Industry?

It's plausible that Maharashtra Scooters' particularly high P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Auto industry are also significantly higher than the market. So it appears the company's ratio could be influenced considerably by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Auto industry. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Maharashtra Scooters will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Maharashtra Scooters would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 147% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1277% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to shrink 6.5% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we can see why Maharashtra Scooters 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.

The Final Word

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Maharashtra Scooters maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Maharashtra Scooters you should be aware of.

You might be able to find a better investment than Maharashtra Scooters. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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