United Spirits Limited's (NSE:UNITDSPR) Shares May Have Run Too Fast Too Soon

United Spirits Limited's (NSE:UNITDSPR) price-to-earnings (or "P/E") ratio of 65.1x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 24x and even P/E's below 14x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for United Spirits 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.

Check out our latest analysis for United Spirits

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

How Is United Spirits' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as United Spirits' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. The latest three year period has also seen an excellent 64% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the ten analysts following the company. With the market predicted to deliver 25% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that United Spirits' 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

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 United Spirits' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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. You can assess many of the main risks through our free balance sheet analysis for United Spirits with six simple checks.

If you're unsure about the strength of United Spirits' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.