Pinning Down Garden Reach Shipbuilders & Engineers Limited's (NSE:GRSE) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 50.5x Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) may be sending very 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. 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.

Garden Reach Shipbuilders & Engineers 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.

Check out our latest analysis for Garden Reach Shipbuilders & Engineers

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Does Growth Match The High P/E?

Garden Reach Shipbuilders & Engineers' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 39%. Pleasingly, EPS has also lifted 97% in aggregate from three years ago, 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.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the dual analysts following the company. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Garden Reach Shipbuilders & Engineers' 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 Garden Reach Shipbuilders & Engineers' P/E?

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.

Our examination of Garden Reach Shipbuilders & Engineers' 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.

Having said that, be aware Garden Reach Shipbuilders & Engineers is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Garden Reach Shipbuilders & Engineers, explore our interactive list of high quality stocks to get an idea of what else is out there.

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