What You Can Learn From Apollo Hospitals Enterprise Limited's (NSE:APOLLOHOSP) P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) as a stock to avoid entirely with its 73.9x 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 so lofty.

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Apollo Hospitals Enterprise certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Apollo Hospitals Enterprise

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Is There Enough Growth For Apollo Hospitals Enterprise?

In order to justify its P/E ratio, Apollo Hospitals Enterprise would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 66% gain to the company's bottom line. EPS has also lifted 16% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 37% as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 25%, which is noticeably less attractive.

With this information, we can see why Apollo Hospitals Enterprise is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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.

As we suspected, our examination of Apollo Hospitals Enterprise's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Apollo Hospitals Enterprise you should be aware of.

If you're unsure about the strength of Apollo Hospitals Enterprise's 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.