Getting In Cheap On Samvardhana Motherson International Limited (NSE:MOTHERSON) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 44.1x Samvardhana Motherson International Limited (NSE:MOTHERSON) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 18x are not unusual. 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.

Samvardhana Motherson International certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Samvardhana Motherson International

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Samvardhana Motherson International.

Does Growth Match The High P/E?

Samvardhana Motherson International's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 108% last year. The latest three year period has also seen an excellent 126% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 79% over the next year. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

With this information, we can see why Samvardhana Motherson International is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Samvardhana Motherson International's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

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

You might be able to find a better investment than Samvardhana Motherson International. 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.