SRF Limited's (NSE:SRF) Share Price Could Signal Some Risk

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider SRF Limited (NSE:SRF) as a stock to avoid entirely with its 50.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

SRF could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for SRF

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

Is There Enough Growth For SRF?

The only time you'd be truly comfortable seeing a P/E as steep as SRF's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. Even so, admirably EPS has lifted 42% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 20% per annum during the coming three years according to the analysts following the company. With the market predicted to deliver 20% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that SRF is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of SRF's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - SRF has 1 warning sign we think you should be aware of.

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