Nestlé India Limited's (NSE:NESTLEIND) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 66.4x Nestlé India Limited (NSE:NESTLEIND) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 24x and even P/E's lower than 14x 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.

Recent times haven't been advantageous for Nestlé India as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Nestlé India

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nestlé India.

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 Nestlé India's to be considered reasonable.

Retrospectively, the last year delivered a decent 9.0% gain to the company's bottom line. Pleasingly, EPS has also lifted 54% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.5% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

With this information, we find it concerning that Nestlé India is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Nestlé India's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Nestlé India that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.