Carborundum Universal Limited's (NSE:CARBORUNIV) Price Is Out Of Tune With Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider Carborundum Universal Limited (NSE:CARBORUNIV) as a stock to avoid entirely with its 54.8x 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.

Carborundum Universal could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Carborundum Universal

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

How Is Carborundum Universal's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 2.9%. This was backed up an excellent period prior to see EPS up by 34% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is not materially different.

In light of this, it's curious that Carborundum Universal's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Carborundum Universal's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If you're unsure about the strength of Carborundum Universal's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.