Procter & Gamble Hygiene and Health Care Limited (NSE:PGHH) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 76.1x Procter & Gamble Hygiene and Health Care Limited (NSE:PGHH) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Procter & Gamble Hygiene and Health Care as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Procter & Gamble Hygiene and Health Care's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. The latest three year period has also seen an excellent 34% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 20% as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

In light of this, it's alarming that Procter & Gamble Hygiene and Health Care's P/E sits above the majority of other companies. 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 Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Procter & Gamble Hygiene and Health Care 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Procter & Gamble Hygiene and Health Care that we have uncovered.

Of course, you might also be able to find a better stock than Procter & Gamble Hygiene and Health Care. 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.