Shareholders Should Be Pleased With Black Box Limited's (NSE:BBOX) Price

Black Box Limited's (NSE:BBOX) price-to-earnings (or "P/E") ratio of 37.5x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x 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 as high as it is.

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Black Box certainly has been doing a good job lately as it's been growing earnings more 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.

See our latest analysis for Black Box

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

How Is Black Box's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 42%. The strong recent performance means it was also able to grow EPS by 264% 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 dual analysts covering the company suggest earnings should grow by 27% per annum over the next three years. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that Black Box's 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.

What We Can Learn From Black Box's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Black Box's 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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Black Box you should be aware of, and 1 of them is a bit unpleasant.

You might be able to find a better investment than Black Box. 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).

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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.