Unpleasant Surprises Could Be In Store For Indian Railway Catering & Tourism Corporation Limited's (NSE:IRCTC) Shares

With a price-to-earnings (or "P/E") ratio of 71.4x Indian Railway Catering & Tourism Corporation Limited (NSE:IRCTC) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's inferior to most other companies of late, Indian Railway Catering & Tourism has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. 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 Indian Railway Catering & Tourism?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. This was backed up an excellent period prior to see EPS up by 494% 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.

Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 21% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Indian Railway Catering & Tourism is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Indian Railway Catering & Tourism's P/E?

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 Indian Railway Catering & Tourism currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Indian Railway Catering & Tourism is showing 2 warning signs in our investment analysis, and 1 of those is significant.

If these risks are making you reconsider your opinion on Indian Railway Catering & Tourism, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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