What You Can Learn From Olectra Greentech Limited's (NSE:OLECTRA) P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Olectra Greentech Limited (NSE:OLECTRA) as a stock to avoid entirely with its 68.9x P/E ratio. 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.

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Olectra Greentech certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Olectra Greentech

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What Are Growth Metrics Telling Us About The High P/E?

Olectra Greentech's 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.

Retrospectively, the last year delivered an exceptional 81% gain to the company's bottom line. Pleasingly, EPS has also lifted 293% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 63% as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 23%, which is noticeably less attractive.

In light of this, it's understandable that Olectra Greentech's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Olectra Greentech's 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.

As we suspected, our examination of Olectra Greentech's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Olectra Greentech with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Olectra Greentech's 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.