Why We're Not Concerned About Prudent Corporate Advisory Services Limited's (NSE:PRUDENT) Share Price

With a price-to-earnings (or "P/E") ratio of 38.4x Prudent Corporate Advisory Services Limited (NSE:PRUDENT) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 22x and even P/E's lower than 11x 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.

Prudent Advisory Services certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Prudent Advisory Services

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Prudent Advisory Services will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

Prudent Advisory Services' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 252% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Prudent Advisory Services' P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

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 Prudent Advisory Services maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Prudent Advisory Services with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Prudent Advisory Services. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.