Motherson Sumi Wiring India Limited's (NSE:MSUMI) Shareholders Might Be Looking For Exit

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Motherson Sumi Wiring India Limited (NSE:MSUMI) as a stock to potentially avoid with its 37.9x 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.

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Motherson Sumi Wiring India could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Motherson Sumi Wiring India

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

How Is Motherson Sumi Wiring India's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 8.5%. This was backed up an excellent period prior to see EPS up by 54% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 18% over the next year. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

With this information, we find it concerning that Motherson Sumi Wiring India is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Motherson Sumi Wiring India's P/E?

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.

Our examination of Motherson Sumi Wiring India's 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Motherson Sumi Wiring India 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 Motherson Sumi Wiring India. 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.