Earnings Tell The Story For Deepak Nitrite Limited (NSE:DEEPAKNTR)

With a price-to-earnings (or "P/E") ratio of 39.9x Deepak Nitrite Limited (NSE:DEEPAKNTR) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 16x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Deepak Nitrite could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Deepak Nitrite

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

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 Deepak Nitrite's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. As a result, earnings from three years ago have also fallen 39% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% per annum over the next three years. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Deepak Nitrite's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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 Deepak Nitrite maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Deepak Nitrite that you need to be mindful of.

If you're unsure about the strength of Deepak Nitrite'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.