Rainbow Children's Medicare Limited's (NSE:RAINBOW) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 68.3x Rainbow Children's Medicare Limited (NSE:RAINBOW) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 19x are not unusual. 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.

With earnings growth that's inferior to most other companies of late, Rainbow Children's Medicare has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Rainbow Children's Medicare

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

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.

Retrospectively, the last year delivered a decent 7.1% gain to the company's bottom line. The latest three year period has also seen an excellent 115% overall rise in EPS, aided somewhat by its short-term performance. 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 20% per annum during the coming three years according to the eight analysts following the company. That's shaping up to be similar to the 19% per annum growth forecast for the broader market.

In light of this, it's curious that Rainbow Children's Medicare's 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 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.

We've established that Rainbow Children's Medicare currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Rainbow Children's Medicare, and understanding should be part of your investment process.

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.

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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.