Getting In Cheap On Cipla Limited (NSE:CIPLA) Is Unlikely

With a median price-to-earnings (or "P/E") ratio of close to 31x in India, you could be forgiven for feeling indifferent about Cipla Limited's (NSE:CIPLA) P/E ratio of 30.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Cipla certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Cipla

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Cipla.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Cipla's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. Pleasingly, EPS has also lifted 87% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is noticeably more attractive.

In light of this, it's curious that Cipla's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that Cipla currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Cipla with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.