AIA Engineering Limited's (NSE:AIAENG) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that AIA Engineering Limited's (NSE:AIAENG) price-to-earnings (or "P/E") ratio of 31x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 31x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times haven't been advantageous for AIA Engineering as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for AIA Engineering

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What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like AIA Engineering's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 7.5%. This was backed up an excellent period prior to see EPS up by 101% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 4.4% per year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially lower than the 21% each year growth forecast for the broader market.

With this information, we find it interesting that AIA Engineering is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From AIA Engineering's P/E?

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.

We've established that AIA Engineering currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for AIA Engineering that you should be aware of.

If you're unsure about the strength of AIA Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.