Some Shareholders Feeling Restless Over Godrej Consumer Products Limited's (NSE:GODREJCP) P/E Ratio

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider Godrej Consumer Products Limited (NSE:GODREJCP) as a stock to avoid entirely with its 67.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Godrej Consumer Products 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 Godrej Consumer Products

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

Is There Enough Growth For Godrej Consumer Products?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Godrej Consumer Products' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. EPS has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the analysts watching the company. That's shaping up to be similar to the 20% each year growth forecast for the broader market.

In light of this, it's curious that Godrej Consumer Products' 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.

What We Can Learn From Godrej Consumer Products' P/E?

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 Godrej Consumer Products currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Godrej Consumer Products has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Godrej Consumer Products. 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.