Rainbow Children's Medicare Limited (NSE:RAINBOW) Not Flying Under The Radar

Rainbow Children's Medicare Limited's (NSE:RAINBOW) price-to-earnings (or "P/E") ratio of 59.2x 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 26x and even P/E's below 15x 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.

We check all companies for important risks. See what we found for Rainbow Children's Medicare in our free report.

Recent times haven't been advantageous for Rainbow Children's Medicare as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, 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.

View our latest analysis for Rainbow Children's Medicare

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

Is There Enough Growth For Rainbow Children's Medicare?

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

If we review the last year of earnings growth, the company posted a worthy increase of 8.2%. Pleasingly, EPS has also lifted 72% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 27% during the coming year according to the nine analysts following the company. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

In light of this, it's understandable that Rainbow Children's Medicare's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Rainbow Children's Medicare'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. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Rainbow Children's Medicare with six simple checks on some of these key factors.

You might be able to find a better investment than Rainbow Children's Medicare. 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.