Pinning Down CRISIL Limited's (NSE:CRISIL) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 43.5x CRISIL Limited (NSE:CRISIL) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 26x and even P/E's lower than 14x 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 so lofty.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

There hasn't been much to differentiate CRISIL's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for CRISIL

Want the full picture on analyst estimates for the company? Then our free report on CRISIL will help you uncover what's on the horizon.

How Is CRISIL's Growth Trending?

In order to justify its P/E ratio, CRISIL would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The latest three year period has also seen a 30% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 20% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

In light of this, it's alarming that CRISIL's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From CRISIL'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 CRISIL currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for CRISIL with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than CRISIL. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.