Risks To Shareholder Returns Are Elevated At These Prices For Lodha Developers Limited (NSE:LODHA)

With a price-to-earnings (or "P/E") ratio of 36.7x Lodha Developers Limited (NSE:LODHA) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Recent times have been advantageous for Lodha Developers as its earnings have been rising faster 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.

View our latest analysis for Lodha Developers

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

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

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

Retrospectively, the last year delivered an exceptional 59% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1,902% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Lodha Developers' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Lodha Developers' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Lodha Developers 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Lodha Developers with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Lodha Developers, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.