Somi Conveyor Beltings Limited's (NSE:SOMICONVEY) P/E Still Appears To Be Reasonable

Somi Conveyor Beltings Limited's (NSE:SOMICONVEY) price-to-earnings (or "P/E") ratio of 36.1x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 26x and even P/E's below 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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For instance, Somi Conveyor Beltings' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Somi Conveyor Beltings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Somi Conveyor Beltings' earnings, revenue and cash flow.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Somi Conveyor Beltings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 118% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Somi Conveyor Beltings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

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 Somi Conveyor Beltings 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. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Somi Conveyor Beltings that you should be aware of.

Of course, you might also be able to find a better stock than Somi Conveyor Beltings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.