When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 20x, you may consider Metro Brands Limited (NSE:METROBRAND) as a stock to avoid entirely with its 70.5x 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.
Recent times have been advantageous for Metro Brands 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Metro Brands
Does Growth Match The High P/E?
In order to justify its P/E ratio, Metro Brands would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 212%. The latest three year period has also seen an excellent 34% 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 five analysts covering the company suggest earnings should grow by 25% over the next year. Meanwhile, the rest of the market is forecast to only expand by 22%, which is noticeably less attractive.
With this information, we can see why Metro Brands is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Metro Brands 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.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Metro Brands with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than Metro Brands. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.
About NSEI:METROBRAND
Flawless balance sheet with proven track record.
