Ramkrishna Forgings Limited's (NSE:RKFORGE) Share Price Not Quite Adding Up

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Ramkrishna Forgings Limited (NSE:RKFORGE) as a stock to potentially avoid with its 50.4x 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 as high as it is.

Ramkrishna Forgings 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.

See our latest analysis for Ramkrishna Forgings

Want the full picture on analyst estimates for the company? Then our free report on Ramkrishna Forgings will help you uncover what's on the horizon.

Is There Enough Growth For Ramkrishna Forgings?

In order to justify its P/E ratio, Ramkrishna Forgings would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 15%. The strong recent performance means it was also able to grow EPS by 307% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 22% per annum over the next three years. That's shaping up to be similar to the 21% per annum growth forecast for the broader market.

With this information, we find it interesting that Ramkrishna Forgings is trading at a high P/E compared to the market. 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.

What We Can Learn From Ramkrishna Forgings' P/E?

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.

We've established that Ramkrishna Forgings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Ramkrishna Forgings you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.