Praj Industries Limited's (NSE:PRAJIND) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may consider Praj Industries Limited (NSE:PRAJIND) as a stock to potentially avoid with its 43.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Praj Industries' earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Praj Industries

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

How Is Praj Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Praj Industries' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The latest three year period has also seen an excellent 170% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.

With this information, we find it concerning that Praj Industries is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Praj Industries' 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.

We've established that Praj Industries currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Praj Industries.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.