Despite an already solid streak, Torrent Power Limited (NSE:TORNTPOWER) shares have soared, with a gain of 27% in the last thirty days. The latest month caps off a massive 168% increase over the past year.
Following the firm price rebound, Torrent Power may be sending bearish signals right now with its price-to-earnings (or "P/E") ratio of 36.9 times, as almost half of all Indian companies have P/E ratios. less than 28x and even P/Es lower than 16x are not unusual. However, the P/E may be high for some reason and requires further investigation to determine if it is justified.
With earnings growth higher than most other companies in recent times, Torrent Power has done relatively well. 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 do growth metrics tell us about the high P/E?
To justify its P/E ratio, Torrent Power would need to produce impressive growth above the market.
Looking back, last year there was an exceptional 57% gain in the company's results. The last three-year period has also seen an excellent overall increase of 199% in EPS, helped by its short-term performance. So we can start by confirming that the company has done a great job of growing profits during that time.
Looking ahead, EPS is expected to rise 30% over the next year, according to the nine analysts who follow the company. Meanwhile, the rest of the market is only expected to expand by 24%, making it noticeably less attractive.
In light of this, it's understandable that Torrent Power's P/E ranks above most other companies. Shareholders are apparently unwilling to part with something that potentially points to a more prosperous future.
The key takeaway
The big rebound in Torrent Power stock has raised the company's P/E to a fairly high level. Using the price-earnings ratio alone to determine whether you should sell your shares is not wise; However, it can be a practical guide to the company's future prospects.
As we suspected, our examination of Torrent Power's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage, investors feel that the potential for earnings deterioration is not great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You always have to take into account the risks, for example: Torrent Power has 2 warning signs We think you should take this into account.
Of course, You may find a fantastic investment if you search for a few good candidates. So check this out. free list of companies with a strong growth track record, trading on a low P/E.
Valuation is complex, but we are helping to simplify it.
Find out if torrent power 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.
