Why We're Not Concerned About Ipca Laboratories Limited's (NSE:IPCALAB) Share Price

With a price-to-earnings (or "P/E") ratio of 61.2x Ipca Laboratories Limited (NSE:IPCALAB) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 19x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Ipca Laboratories certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for Ipca Laboratories

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 33% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 30% per annum over the next three years. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

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 Final Word

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 Ipca Laboratories maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Ipca Laboratories.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.