Lloyds Engineering Works Limited's (NSE:LLOYDSENGG) price-to-earnings (or "P/E") ratio of 57x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Earnings have risen firmly for Lloyds Engineering Works recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for Lloyds Engineering Works
How Is Lloyds Engineering Works' Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Lloyds Engineering Works' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. The latest three year period has also seen an excellent 1,237% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is only predicted to deliver 23% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
In light of this, it's understandable that Lloyds Engineering Works' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
What We Can Learn From Lloyds Engineering Works' 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.
We've established that Lloyds Engineering Works maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
It is also worth noting that we have found 1 warning sign for Lloyds Engineering Works that you need to take into consideration.
If you're unsure about the strength of Lloyds Engineering Works' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.