There's Reason For Concern Over Narayana Hrudayalaya Limited's (NSE:NH) Price

With a price-to-earnings (or "P/E") ratio of 46.1x Narayana Hrudayalaya Limited (NSE:NH) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x 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.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Narayana Hrudayalaya hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Narayana Hrudayalaya

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

Is There Enough Growth For Narayana Hrudayalaya?

Narayana Hrudayalaya's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 2.7% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 108% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the eleven analysts watching the company. With the market predicted to deliver 19% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Narayana Hrudayalaya is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

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 Narayana Hrudayalaya's 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Narayana Hrudayalaya with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Narayana Hrudayalaya, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.