The Price Is Right For Sona BLW Precision Forgings Limited (NSE:SONACOMS)

With a price-to-earnings (or "P/E") ratio of 64.7x Sona BLW Precision Forgings Limited (NSE:SONACOMS) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 20x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

There hasn't been much to differentiate Sona BLW Precision Forgings' and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sona BLW Precision Forgings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sona BLW Precision Forgings.

Is There Enough Growth For Sona BLW Precision Forgings?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sona BLW Precision Forgings' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.0% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 36% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 21% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Sona BLW Precision Forgings 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 Key Takeaway

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.

We've established that Sona BLW Precision Forgings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Sona BLW Precision Forgings, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.