Earnings Tell The Story For Craftsman Automation Limited (NSE:CRAFTSMAN)

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 20x, you may consider Craftsman Automation Limited (NSE:CRAFTSMAN) as a stock to avoid entirely with its 31.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Craftsman Automation certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Craftsman Automation

Keen to find out how analysts think Craftsman Automation's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Craftsman Automation's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 84% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 55% 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 36% per annum during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 22% per year, which is noticeably less attractive.

With this information, we can see why Craftsman Automation 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 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.

As we suspected, our examination of Craftsman Automation's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Craftsman Automation that you need to be mindful of.

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.