Shareholders Should Be Pleased With Ipca Laboratories Limited's (NSE:IPCALAB) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may consider Ipca Laboratories Limited (NSE:IPCALAB) as a stock to avoid entirely with its 41.9x 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.

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With earnings growth that's superior to most other companies of late, Ipca Laboratories has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ipca Laboratories

Keen to find out how analysts think Ipca Laboratories' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Ipca Laboratories?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ipca Laboratories' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 35%. EPS has also lifted 8.1% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 25% per year over the next three years. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Ipca Laboratories' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Ipca Laboratories' 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.

Before you take the next step, you should know about the 1 warning sign for Ipca Laboratories that we have uncovered.

You might be able to find a better investment than Ipca Laboratories. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.