Investors Still Waiting For A Pull Back In Ethos Limited (NSE:ETHOSLTD)

With a price-to-earnings (or "P/E") ratio of 72.1x Ethos Limited (NSE:ETHOSLTD) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Ethos could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Ethos' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. The latest three year period has also seen an excellent 1,081% 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.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 36% over the next year. With the market only predicted to deliver 24%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Ethos' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Ethos' 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 Ethos maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Ethos.

If you're unsure about the strength of Ethos' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.