Some Shareholders Feeling Restless Over Bharti Airtel Limited's (NSE:BHARTIARTL) P/E Ratio

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Bharti Airtel Limited (NSE:BHARTIARTL) as a stock to potentially avoid with its 36.6x P/E ratio. 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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With earnings growth that's superior to most other companies of late, Bharti Airtel has been doing relatively well. 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.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Bharti Airtel would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 343%. The latest three year period has also seen an excellent 618% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the analysts watching the company. With the market predicted to deliver 22% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Bharti Airtel's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

We've established that Bharti Airtel currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Bharti Airtel (1 is significant!) that you need to be mindful of.

If you're unsure about the strength of Bharti Airtel'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.