Jindal Steel Limited's (NSE:JINDALSTEL) P/E Still Appears To Be Reasonable

Explore Jindal Steel's Fair Values from the Community and select yours

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Jindal Steel Limited (NSE:JINDALSTEL) as a stock to potentially avoid with its 36.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Jindal Steel hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Jindal Steel

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

Is There Enough Growth For Jindal Steel?

The only time you'd be truly comfortable seeing a P/E as high as Jindal Steel'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 53%. This means it has also seen a slide in earnings over the longer-term as EPS is down 66% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 56% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 22% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Jindal Steel is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Jindal Steel's 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Jindal Steel that you need to be mindful of.

Of course, you might also be able to find a better stock than Jindal Steel. 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.