The Jyothy Labs Limited (NSE:JYOTHYLAB) share price could indicate some risk

With a price-to-earnings ratio (or “P/E”) of 43.4x Jyothy Labs Limited (NSE:JYOTHYLAB) could be sending bearish signals at this point, given that almost half of all companies in India have price-to-earnings ratios below 31x and even price-to-earnings ratios below 18x are not uncommon. However, the price-to-earnings ratio may be high for a reason and further research is needed to determine if this is justified.

Jyothy Labs has certainly done a good job lately, as its profits have grown more than most other companies. It seems that many expect the strong profit development to continue, which has caused the price/earnings to rise. If not, existing shareholders may be somewhat nervous about the viability of the share price.

Check out our latest analysis for Jyothy Labs

If you want to see what analysts are predicting for the future, check out our free report on Jyothy Labs.

What is the growth trend of Jyothy Labs?

To justify its price-to-earnings ratio, Jyothy Labs would need to achieve impressive above-market growth.

Looking at the past year of earnings growth, the company posted a whopping 61% increase. Strong recent performance has allowed the company to grow earnings per share by a combined 76% over the past three years. Therefore, it’s fair to say that earnings growth has been excellent for the company recently.

Looking to the future, estimates from the ten analysts covering the company suggest earnings should grow 17% in the coming year. With the market expected to deliver 24% growth, the company is positioned for a weaker earnings performance.

With this information, we find it concerning that Jyothy Labs is trading at a price-to-earnings ratio that is higher than the market. Apparently, many investors in the company are much more optimistic than analysts indicate and are unwilling to let go of their shares at any price. There is a good chance that these shareholders will face future disappointment if the price-to-earnings ratio falls to a level more in line with growth prospects.

The most important takeaway

Although the price-to-earnings ratio should not be the determining factor in whether or not to buy a stock, it is a good barometer of earnings expectations.

Our review of Jyothy Labs’ analyst forecasts found that the lower earnings outlook isn’t having nearly as much of an impact on the high price-to-earnings ratio as we expected. If we see weak earnings prospects with slower growth than the market, we suspect the stock price is at risk of falling, driving the high price/earnings lower. This puts shareholders’ investments at significant risk and puts potential investors at risk of paying an excessive premium.

Before you settle for your opinion, we found out 1 warning sign for Jyothy Labs that you should be aware of.

Naturally, You might find a fantastic investment by looking at a few good candidates. So take a look at this free list of companies with a strong growth trajectory, trading at a low price/earnings.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.