Thermax Limited's (NSE:THERMAX) Share Price Matching Investor Opinion

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider Thermax Limited (NSE:THERMAX) as a stock to avoid entirely with its 72.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Thermax certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Thermax

Keen to find out how analysts think Thermax's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Thermax?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. Pleasingly, EPS has also lifted 256% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 22% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

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

The Bottom Line On Thermax's 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.

As we suspected, our examination of Thermax's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Thermax you should be aware of, and 1 of them doesn't sit too well with us.

Of course, you might also be able to find a better stock than Thermax. 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.