Pinning Down Amrutanjan Health Care Limited's (NSE:AMRUTANJAN) P/E Is Difficult Right Now

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Amrutanjan Health Care Limited (NSE:AMRUTANJAN) as a stock to avoid entirely with its 51.7x P/E ratio. 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.

The recent earnings growth at Amrutanjan Health Care would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Amrutanjan Health Care

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Amrutanjan Health Care's earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.7% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 24% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 24% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Amrutanjan Health Care is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Amrutanjan Health Care's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Amrutanjan Health Care currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Amrutanjan Health Care that you should be aware of.

If these risks are making you reconsider your opinion on Amrutanjan Health Care, 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.