Intellect Design Arena Limited (NSE:INTELLECT) Not Lagging Market On Growth Or Pricing

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 24x, you may consider Intellect Design Arena Limited (NSE:INTELLECT) as a stock to potentially avoid with its 32.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Intellect Design Arena could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, 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.

See our latest analysis for Intellect Design Arena

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How Is Intellect Design Arena's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. This means it has also seen a slide in earnings over the longer-term as EPS is down 23% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 32% each year during the coming three years according to the two analysts following the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Intellect Design Arena is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Intellect Design Arena's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Intellect Design Arena's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Intellect Design Arena with six simple checks on some of these key factors.

If you're unsure about the strength of Intellect Design Arena's 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.