Venus Pipes and Tubes Limited (NSE:VENUSPIPES) Could Be Riskier Than It Looks

It's not a stretch to say that Venus Pipes and Tubes Limited's (NSE:VENUSPIPES) price-to-earnings (or "P/E") ratio of 29.4x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Venus Pipes and Tubes could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for Venus Pipes and Tubes

Keen to find out how analysts think Venus Pipes and Tubes' 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 P/E?

In order to justify its P/E ratio, Venus Pipes and Tubes would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 6.7% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 102% in total over the last three years. 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.

Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

With this information, we find it interesting that Venus Pipes and Tubes is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

We've established that Venus Pipes and Tubes currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Venus Pipes and Tubes with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Venus Pipes and Tubes. 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.