Subdued Growth No Barrier To Dabur India Limited's (NSE:DABUR) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Dabur India Limited (NSE:DABUR) as a stock to avoid entirely with its 56.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's inferior to most other companies of late, Dabur India has been relatively sluggish. 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.

See our latest analysis for Dabur India

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What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 17% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 15% per annum over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Dabur India is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Dabur India's P/E

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.

We've established that Dabur India currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

Of course, you might also be able to find a better stock than Dabur India. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.