Getting In Cheap On Bharat Bijlee Limited (NSE:BBL) Might Be Difficult

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may consider Bharat Bijlee Limited (NSE:BBL) as a stock to potentially avoid with its 42x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Bharat Bijlee has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Bharat Bijlee

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Bharat Bijlee will help you shine a light on its historical performance.

How Is Bharat Bijlee's Growth Trending?

In order to justify its P/E ratio, Bharat Bijlee would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. Pleasingly, EPS has also lifted 168% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Bharat Bijlee is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bharat Bijlee maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Bharat Bijlee you should be aware of.

If these risks are making you reconsider your opinion on Bharat Bijlee, 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.