Cautious Investors Not Rewarding VA Tech Wabag Limited's (NSE:WABAG) Performance Completely

With a median price-to-earnings (or "P/E") ratio of close to 31x in India, you could be forgiven for feeling indifferent about VA Tech Wabag Limited's (NSE:WABAG) P/E ratio of 33x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, VA Tech Wabag has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Does Growth Match The P/E?

In order to justify its P/E ratio, VA Tech Wabag would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 466% last year. The strong recent performance means it was also able to grow EPS by 101% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 23% each year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

In light of this, it's curious that VA Tech Wabag's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On VA Tech Wabag's 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 VA Tech Wabag currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

If you're unsure about the strength of VA Tech Wabag'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.