When about half of India's companies have price-to-earnings (or "P/E") ratios of less than 30 times, it can be considered Torrent Pharmaceuticals Limited (NSE:TORNTPHARM) as a stock to avoid entirely with its P/E ratio of 59.1x. However, the P/E may be quite high for a reason and requires further investigation to determine if it is justified.
Recent times have been advantageous for Torrent Pharmaceuticals, as its profits have grown faster than most other companies. It seems that many expect the strong earnings performance to persist, which has lifted the P/E. It is really to be hoped that this is the case; Otherwise, you'll be paying a pretty high price for no particular reason.
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What is the growth trend of Torrent Pharmaceuticals?
Torrent Pharmaceuticals' P/E ratio would be typical of a company that is expected to deliver very strong growth and, more importantly, perform much better than the market.
If we look back at the last year of earnings growth, the company posted a fantastic 69% increase. As a result, it also grew EPS by 12% in total over the last three years. So it's fair to say that the recent earnings growth has been respectable for the company.
Looking ahead, EPS is expected to rise 28% annually over the next three years, according to analysts who follow the company. This appears to be materially higher than the 19% annual growth forecast for the broader market.
With this information, we can see why Torrent Pharmaceuticals is trading at such a high P/E compared to the market. Shareholders are apparently unwilling to part with something that potentially points to a more prosperous future.
What can we learn from Torrent Pharmaceuticals' P/E?
We generally caution against reading too much into the P/E ratio when making investment decisions, even though it can reveal a lot about what other market participants think about the company.
We have established that Torrent Pharmaceuticals maintains its high P/E thanks to its expected growth being higher than that of the broader market, as expected. Right now shareholders are comfortable with the P/E because they are fairly confident that future earnings are not threatened. It's hard to imagine the share price falling sharply in the near future under these circumstances.
It is also worth noting that we have found 2 warning signs for Torrent Pharmaceuticals that you should take into account.
You may be able to find a better investment than Torrent Pharmaceuticals. If you want a selection of possible candidates, check this out free list of interesting companies that trade on a low P/E (but have shown they can grow earnings).
Valuation is complex, but we are helping to simplify it.
Find out if Torrente Pharmaceuticals is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
