Getting In Cheap On Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) Is Unlikely

With a price-to-earnings (or "P/E") ratio of 34.7x Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) may be sending 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Sun Pharmaceutical Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Sun Pharmaceutical Industries

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

How Is Sun Pharmaceutical Industries' Growth Trending?

In order to justify its P/E ratio, Sun Pharmaceutical Industries would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 108%. The latest three year period has also seen an excellent 479% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

In light of this, it's alarming that Sun Pharmaceutical Industries' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Sun Pharmaceutical Industries' 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.

We've established that Sun Pharmaceutical Industries currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sun Pharmaceutical Industries that you need to be mindful of.

If these risks are making you reconsider your opinion on Sun Pharmaceutical Industries, 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.