Investors Still Waiting For A Pull Back In Bharat Dynamics Limited (NSE:BDL)

With a price-to-earnings (or "P/E") ratio of 66.5x Bharat Dynamics Limited (NSE:BDL) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x 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.

Bharat Dynamics could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Bharat Dynamics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Bharat Dynamics.

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

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.8% last year. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, partly 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.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 50% over the next year. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

With this information, we can see why Bharat Dynamics is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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 Bharat Dynamics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

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

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.