BEW Engineering Limited (NSE:BEWLTD) price-to-earnings (or “P/E”) ratio of 35.2x might give the impression that this is a strong sell-off right now relative to the Indian market, where around the half of companies have P/E ratios below 20x and even P/E below 10x is quite common. However, the P/E may be quite high for a reason and it requires further investigation to determine if it is warranted.
BEW Engineering has been doing a good job lately as its profits have grown at a steady pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the market in the near future. Otherwise, existing shareholders might be a little worried about the viability of the share price.
Check out our latest analysis for BEW Engineering
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What do the growth indicators tell us about the high P/E?
In order to justify its P/E ratio, BEW Engineering would need to produce exceptional growth well above the market.
Looking back first, we see that the company managed to increase its earnings per share by 15% last year. Fortunately, EPS was also up 424% overall from three years ago, thanks in part to the last 12 months of growth. Therefore, it’s fair to say that recent earnings growth has been superb for the company.
Comparing that to the market, which is only expected to grow 21% over the next 12 months, the company’s momentum is stronger based on recent mid-term annualized results.
In light of this, it’s understandable that BEW Engineering’s P/E sits above the majority of other companies. It seems most investors expect this strong growth to continue and are willing to pay more for the stock.
BEW Engineering P/E Basics
Generally, we prefer to limit the use of the price/earnings ratio to establishing what the market thinks of the overall health of a company.
As we suspected, our review of BEW Engineering revealed that its three-year earnings trend is contributing to its high P/E, given that it looks better than current market expectations. At present, shareholders are comfortable with the P/E because they are confident that earnings are not at risk. If recent medium-term earnings trends continue, it is difficult to see the stock price falling sharply in the near future under these circumstances.
Before you decide your opinion, we found out 2 warning signs for BEW Engineering (1 is a little unpleasant!) which you should be aware of.
If you are uncertain about the strength of BEW Engineering’s businesswhy not explore our interactive list of stocks with strong trading fundamentals for other companies you may have missed.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.