Getting In Cheap On Mahindra Lifespace Developers Limited (NSE:MAHLIFE) Might Be Difficult

Mahindra Lifespace Developers Limited's (NSE:MAHLIFE) price-to-earnings (or "P/E") ratio of 75.3x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 29x and even P/E's below 16x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Mahindra Lifespace Developers could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Mahindra Lifespace Developers

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

Is There Enough Growth For Mahindra Lifespace Developers?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Mahindra Lifespace Developers' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 70% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 40% per year over the next three years. With the market only predicted to deliver 22% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Mahindra Lifespace Developers' 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

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.

As we suspected, our examination of Mahindra Lifespace Developers' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Mahindra Lifespace Developers has 3 warning signs (and 2 which are potentially serious) we think you should know about.

Of course, you might also be able to find a better stock than Mahindra Lifespace Developers. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.