Escorts Kubota Limited's (NSE:ESCORTS) Business Is Trailing The Market But Its Shares Aren't

It's not a stretch to say that Escorts Kubota Limited's (NSE:ESCORTS) price-to-earnings (or "P/E") ratio of 31x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Escorts Kubota certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Escorts Kubota

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

How Is Escorts Kubota's Growth Trending?

The only time you'd be comfortable seeing a P/E like Escorts Kubota's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The latest three year period has also seen a 15% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 8.0% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 18% per year growth forecast for the broader market.

With this information, we find it interesting that Escorts Kubota is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 Escorts Kubota currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Escorts Kubota with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Escorts Kubota. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.