Getting In Cheap On Sula Vineyards Limited (NSE:SULA) Is Unlikely

With a price-to-earnings (or "P/E") ratio of 49.4x Sula Vineyards Limited ( NSE:SULA ) 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 13x 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.

Sula Vineyards 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 Sula Vineyards

Keen to find out how analysts think Sula Vineyards' future stacks up against the industry? In that case, our free report is a great place to start .

Is There Enough Growth For Sula Vineyards?

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

If we review the last year of earnings growth, the company posted a terrific increase of 50%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 14% per annum over the next three years. That's shaping up to be materially lower than the 21% per year growth forecast for the broader market.

In light of this, it's alarming that Sula Vineyards' 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.

The Bottom Line On Sula Vineyards' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sula Vineyards currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Sula Vineyards that we have uncovered.

You might be able to find a better investment than Sula Vineyards. 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).

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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.