Market Participants Recognise Titagarh Rail Systems Limited's (NSE:TITAGARH) Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may consider Titagarh Rail Systems Limited (NSE:TITAGARH) as a stock to avoid entirely with its 42.2x 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.

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With earnings growth that's inferior to most other companies of late, Titagarh Rail Systems has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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Is There Enough Growth For Titagarh Rail Systems?

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

Retrospectively, the last year delivered a decent 4.9% gain to the company's bottom line. Pleasingly, EPS has also lifted 921% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 37% as estimated by the seven analysts watching the company. With the market only predicted to deliver 24%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Titagarh Rail Systems' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Titagarh Rail Systems maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Titagarh Rail Systems with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Titagarh Rail Systems. 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.