Some Shareholders Feeling Restless Over APAR Industries Limited's (NSE:APARINDS) P/E Ratio

With a median price-to-earnings (or "P/E") ratio of close to 31x in India, you could be forgiven for feeling indifferent about APAR Industries Limited's (NSE:APARINDS) P/E ratio of 30.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

APAR Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Does Growth Match The P/E?

In order to justify its P/E ratio, APAR Industries would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 116%. The latest three year period has also seen an excellent 726% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 2.7% each year during the coming three years according to the three analysts following the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that APAR Industries' P/E sits in line with the majority of other companies. 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.

The Bottom Line On APAR Industries' 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 APAR Industries currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - APAR Industries has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on APAR Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.