Eicher Motors Limited (NSE:EICHERMOT) Investors Are Less Pessimistic Than Expected

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Eicher Motors Limited (NSE:EICHERMOT) as a stock to potentially avoid with its 33.2x 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 as high as it is.

We check all companies for important risks. See what we found for Eicher Motors in our free report.

Recent times haven't been advantageous for Eicher Motors as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Eicher Motors

Keen to find out how analysts think Eicher Motors' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Eicher Motors' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Pleasingly, EPS has also lifted 178% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.

With this information, we find it concerning that Eicher Motors is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Eicher Motors' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Eicher Motors' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Eicher Motors with six simple checks will allow you to discover any risks that could be an issue.

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.