Getting In Cheap On TD Power Systems Limited (NSE:TDPOWERSYS) Is Unlikely

TD Power Systems Limited's (NSE:TDPOWERSYS) price-to-earnings (or "P/E") ratio of 51.9x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 30x and even P/E's below 17x are quite common. 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.

The earnings growth achieved at TD Power Systems over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for TD Power Systems

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on TD Power Systems will help you shine a light on its historical performance.

Is There Enough Growth For TD Power Systems?

In order to justify its P/E ratio, TD Power Systems would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 111% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 26% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that TD Power Systems is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that TD Power Systems currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for TD Power Systems (of which 1 is significant!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.