Star Cement Limited (NSE:STARCEMENT) Investors Are Less Pessimistic Than Expected

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Star Cement Limited (NSE:STARCEMENT) as a stock to potentially avoid with its 30.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Star Cement certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Star Cement's Growth Trending?

In order to justify its P/E ratio, Star Cement would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 53% last year. The latest three year period has also seen an excellent 31% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

In light of this, it's alarming that Star Cement's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

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 Star Cement currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Star Cement that you should be aware of.

If these risks are making you reconsider your opinion on Star Cement, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.