What You Can Learn From UltraTech Cement Limited's (NSE:ULTRACEMCO) P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider UltraTech Cement Limited (NSE:ULTRACEMCO) as a stock to avoid entirely with its 55.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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UltraTech Cement 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for UltraTech Cement

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Is There Enough Growth For UltraTech Cement?

In order to justify its P/E ratio, UltraTech Cement would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 6.1% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that UltraTech Cement'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 Bottom Line On UltraTech Cement's P/E

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.

As we suspected, our examination of UltraTech Cement'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. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with UltraTech Cement, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.