Prince Pipes and Fittings Limited's (NSE:PRINCEPIPE) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 40.7x Prince Pipes and Fittings Limited (NSE:PRINCEPIPE) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Prince Pipes and Fittings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Prince Pipes and Fittings

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Is There Enough Growth For Prince Pipes and Fittings?

There's an inherent assumption that a company should outperform the market for P/E ratios like Prince Pipes and Fittings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 50% last year. Still, incredibly EPS has fallen 18% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 21% each year, which is noticeably more attractive.

With this information, we find it concerning that Prince Pipes and Fittings 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.

The Key Takeaway

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 Prince Pipes and Fittings 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Prince Pipes and Fittings that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.