Sun Pharmaceutical Industries Limited's (NSE:SUNPHARMA) Price Is Out Of Tune With Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Sun Pharmaceutical Industries Limited (NSE:SUNPHARMA) as a stock to potentially avoid with its 41.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Sun Pharmaceutical Industries has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See 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?

The only time you'd be truly comfortable seeing a P/E as high as Sun Pharmaceutical Industries' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 112% gain to the company's bottom line. The latest three year period has also seen an excellent 270% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 21% each year, which is not materially different.

In light of this, it's curious that Sun Pharmaceutical Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Sun Pharmaceutical Industries' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Sun Pharmaceutical Industries currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Sun Pharmaceutical Industries.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.