Shareholders Should Be Pleased With APL Apollo Tubes Limited's (NSE:APLAPOLLO) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider APL Apollo Tubes Limited (NSE:APLAPOLLO) as a stock to avoid entirely with its 65x P/E ratio. 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.

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With earnings growth that's inferior to most other companies of late, APL Apollo Tubes 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.

See our latest analysis for APL Apollo Tubes

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Is There Enough Growth For APL Apollo Tubes?

APL Apollo Tubes' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.3% last year. The solid recent performance means it was also able to grow EPS by 10% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 33% each year over the next three years. With the market only predicted to deliver 22% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that APL Apollo Tubes' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of APL Apollo Tubes' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with APL Apollo Tubes.

If these risks are making you reconsider your opinion on APL Apollo Tubes, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.