Praj Industries Limited's (NSE:PRAJIND) 25% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Praj Industries Limited (NSE:PRAJIND) shares have had a horrible month, losing 25% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 31%, which is great even in a bull market.

Even after such a large drop in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Praj Industries as a stock to potentially avoid with its 42.5x 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 as high as it is.

Praj Industries could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Praj Industries' Growth Trending?

In order to justify its P/E ratio, Praj Industries would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 3.1% decrease to the company's bottom line. Even so, admirably EPS has lifted 88% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 26% over the next year. With the market predicted to deliver 25% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Praj Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Praj Industries' P/E?

There's still some solid strength behind Praj Industries' P/E, if not its share price lately. 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.

Our examination of Praj Industries' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Praj Industries that you should be aware of.

If these risks are making you reconsider your opinion on Praj Industries, 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.