Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 42.7x Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

While the market has experienced earnings growth lately, Crompton Greaves Consumer Electricals' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Crompton Greaves Consumer Electricals

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Crompton Greaves Consumer Electricals.

How Is Crompton Greaves Consumer Electricals' Growth Trending?

In order to justify its P/E ratio, Crompton Greaves Consumer Electricals would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 20% per annum, which is not materially different.

In light of this, it's curious that Crompton Greaves Consumer Electricals' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Crompton Greaves Consumer Electricals 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Crompton Greaves Consumer Electricals you should be aware of.

You might be able to find a better investment than Crompton Greaves Consumer Electricals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.