The Price Is Right For Samvardhana Motherson International Limited (NSE:MOTHERSON)

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may consider Samvardhana Motherson International Limited (NSE:MOTHERSON) as a stock to potentially avoid with its 42.1x 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.

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.

Is There Enough Growth For Samvardhana Motherson International?

The only time you'd be truly comfortable seeing a P/E as high as Samvardhana Motherson International's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 59%. The latest three year period has also seen an excellent 31% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 26% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 20% each year 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Samvardhana Motherson International that you need to be mindful of.

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 low P/E.

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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.