Optimistic Investors Push Motherson Sumi Wiring India Limited (NSE:MSUMI) Shares Up 27% But Growth Is Lacking

Motherson Sumi Wiring India Limited (NSE:MSUMI) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 6.2% isn't as attractive.

Following the firm bounce in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may consider Motherson Sumi Wiring India as a stock to avoid entirely with its 54.7x 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 so lofty.

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Motherson Sumi Wiring India hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out 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.

Does Growth Match The High P/E?

Motherson Sumi Wiring India's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 8.9% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 31% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is not materially different.

In light of this, it's curious that Motherson Sumi Wiring India's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The strong share price surge has got Motherson Sumi Wiring India's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Motherson Sumi Wiring India's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Motherson Sumi Wiring India that you should be aware of.

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.