Subdued Growth No Barrier To Carborundum Universal Limited's (NSE:CARBORUNIV) Price

With a price-to-earnings (or "P/E") ratio of 47x Carborundum Universal Limited (NSE:CARBORUNIV) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 31x 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 Carborundum Universal 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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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.

Taking a look back first, we see that the company grew earnings per share by an impressive 41% last year. Pleasingly, EPS has also lifted 76% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the eleven analysts watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Carborundum Universal's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 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.

We've established that Carborundum Universal 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Carborundum Universal that we have uncovered.

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.