Zydus Wellness Limited's (NSE:ZYDUSWELL) Share Price Not Quite Adding Up

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Zydus Wellness Limited (NSE:ZYDUSWELL) as a stock to potentially avoid with its 41.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Zydus Wellness 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 Zydus Wellness

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

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 7.2%. This was backed up an excellent period prior to see EPS up by 86% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 20% per year over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Zydus Wellness' 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. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Zydus Wellness' 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zydus Wellness that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.