There's Reason For Concern Over Hindustan Zinc Limited's (NSE:HINDZINC) Price

There wouldn't be many who think Hindustan Zinc Limited's (NSE:HINDZINC) price-to-earnings (or "P/E") ratio of 23.6x is worth a mention when the median P/E in India is similar at about 25x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for Hindustan Zinc as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Hindustan Zinc

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hindustan Zinc.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Hindustan Zinc's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.2% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% each year over the next three years. With the market predicted to deliver 20% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Hindustan Zinc's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Hindustan Zinc's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hindustan Zinc that you should be aware of.

If you're unsure about the strength of Hindustan Zinc'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.