Elgi Equipments Limited's (NSE:ELGIEQUIP) Shareholders Might Be Looking For Exit

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider Elgi Equipments Limited (NSE:ELGIEQUIP) as a stock to avoid entirely with its 49.2x 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.

Elgi Equipments 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Elgi Equipments' Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 48% last year. Pleasingly, EPS has also lifted 575% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 1.2% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% per annum, which is noticeably more attractive.

In light of this, it's alarming that Elgi Equipments' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Elgi Equipments' P/E?

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.

Our examination of Elgi Equipments' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Elgi Equipments that you should be aware of.

If these risks are making you reconsider your opinion on Elgi Equipments, 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.