Some Central Depository Services (India) Limited (NSE:CDSL) Shareholders Look For Exit As Shares Take 29% Pounding

Central Depository Services (India) Limited (NSE:CDSL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 45%, which is great even in a bull market.

In spite of the heavy fall in price, Central Depository Services (India) may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.6x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x 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.

Central Depository Services (India) certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Central Depository Services (India)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Central Depository Services (India).

How Is Central Depository Services (India)'s Growth Trending?

In order to justify its P/E ratio, Central Depository Services (India) would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 57% last year. The latest three year period has also seen an excellent 95% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 19% each year over the next three years. That's shaping up to be similar to the 20% per annum growth forecast for the broader market.

In light of this, it's curious that Central Depository Services (India)'s P/E sits above the majority of other companies. 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.

The Final Word

Central Depository Services (India)'s shares may have retreated, but its P/E is still flying high. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Central Depository Services (India)'s analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Central Depository Services (India) with six simple checks on some of these key factors.

You might be able to find a better investment than Central Depository Services (India). 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.