SRF Limited's (NSE:SRF) P/E Is On The Mark

With a price-to-earnings (or "P/E") ratio of 58.9x SRF Limited (NSE:SRF) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 28x and even P/E's lower than 15x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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There hasn't been much to differentiate SRF's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SRF

Keen to find out how analysts think SRF's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 32% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 31% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 20% each year, which is noticeably less attractive.

In light of this, it's understandable that SRF's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On SRF's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of SRF's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for SRF you should be aware of.

If these risks are making you reconsider your opinion on SRF, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.