There's Reason For Concern Over Hindustan Aeronautics Limited's (NSE:HAL) Price

There wouldn't be many who think Hindustan Aeronautics Limited's (NSE:HAL) price-to-earnings (or "P/E") ratio of 36.4x is worth a mention when the median P/E in India is similar at about 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Hindustan Aeronautics as its earnings have been rising faster 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Hindustan Aeronautics

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

How Is Hindustan Aeronautics' Growth Trending?

Hindustan Aeronautics' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. Pleasingly, EPS has also lifted 151% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 4.9% per annum as estimated by the nine analysts watching the company. With the market predicted to deliver 20% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Hindustan Aeronautics is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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

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 Hindustan Aeronautics currently trades on a 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Hindustan Aeronautics that you need to take into consideration.

If these risks are making you reconsider your opinion on Hindustan Aeronautics, 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.