When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may consider Torrent Pharmaceuticals Limited (NSE:TORNTPHARM) as a stock to avoid entirely with its 60.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Torrent Pharmaceuticals' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Torrent Pharmaceuticals
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Torrent Pharmaceuticals' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. The strong recent performance means it was also able to grow EPS by 150% in total over the last three years. 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 year as estimated by the analysts watching the company. That's shaping up to be similar to the 19% each year growth forecast for the broader market.
In light of this, it's curious that Torrent Pharmaceuticals' 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 Torrent Pharmaceuticals' P/E?
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.
Our examination of Torrent Pharmaceuticals' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Torrent Pharmaceuticals that you should be aware of.
You might be able to find a better investment than Torrent Pharmaceuticals. 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).
Valuation is complex, but we're here to simplify it.
Discover if Torrent Pharmaceuticals might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.