Jyothy Labs Limited's (NSE:JYOTHYLAB) Shareholders Might Be Looking For Exit

Jyothy Labs Limited's (NSE:JYOTHYLAB) price-to-earnings (or "P/E") ratio of 33.3x might make it look like a 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Jyothy Labs as its earnings have been rising slower than most other companies. 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.

Check out our latest analysis for Jyothy Labs

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jyothy Labs.

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

The only time you'd be truly comfortable seeing a P/E as high as Jyothy Labs' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 143% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 12% during the coming year according to the eleven analysts following the company. With the market predicted to deliver 26% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Jyothy Labs 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Jyothy Labs' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

Having said that, be aware Jyothy Labs is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Jyothy Labs. 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.