Stock Analysis

Escorts Kubota Limited (NSE:ESCORTS) Investors Are Less Pessimistic Than Expected

NSEI:ESCORTS
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With a price-to-earnings (or "P/E") ratio of 39.4x Escorts Kubota Limited (NSE:ESCORTS) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 33x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Escorts Kubota as its earnings have been rising faster 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.

Check out our latest analysis for Escorts Kubota

pe-multiple-vs-industry
NSEI:ESCORTS Price to Earnings Ratio vs Industry November 7th 2024
Keen to find out how analysts think Escorts Kubota's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Escorts Kubota?

In order to justify its P/E ratio, Escorts Kubota 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 34%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 2.8% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the 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 alarming that Escorts Kubota's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Escorts Kubota's 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 Escorts Kubota currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Escorts Kubota with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Valuation is complex, but we're here to simplify it.

Discover if Escorts Kubota might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.