With Eureka Forbes Limited (NSE:EUREKAFORB) It Looks Like You'll Get What You Pay For

With a price-to-earnings (or "P/E") ratio of 73.6x Eureka Forbes Limited (NSE:EUREKAFORB) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 28x and even P/E's lower than 16x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Eureka Forbes 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Eureka Forbes

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 41% gain to the company's bottom line. The latest three year period has also seen an excellent 883% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 34% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 26% growth forecast for the broader market.

In light of this, it's understandable that Eureka Forbes' 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 Bottom Line On Eureka Forbes' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Eureka Forbes' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Eureka Forbes 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 Eureka Forbes. 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.