With a price-to-earnings (or "P/E") ratio of 64.3x Affle (India) Limited (NSE:AFFLE) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With earnings growth that's inferior to most other companies of late, Affle (India) has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for Affle (India)
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Affle (India)'s to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 7.9%. Pleasingly, EPS has also lifted 192% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 27% per year over the next three years. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.
With this information, we can see why Affle (India) is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Affle (India)'s P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Affle (India)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Having said that, be aware Affle (India) is showing 1 warning sign in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Affle (India), 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.
About NSEI:AFFLE
Affle (India)
Provides mobile advertisement services through information technology and software development services for mobiles in India and internationally.
Flawless balance sheet with reasonable growth potential.
