Honeywell Automation India Limited's (NSE:HONAUT) Share Price Could Signal Some Risk
When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 22x, you may consider Honeywell Automation India Limited (NSE:HONAUT) as a stock to avoid entirely with its 55.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Honeywell Automation India hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Honeywell Automation India
How Is Honeywell Automation India's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Honeywell Automation India's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 2.2% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 35% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the six analysts following the company. With the market predicted to deliver 20% growth each year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Honeywell Automation India is trading at a P/E higher than the market. 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 Bottom Line On Honeywell Automation India's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Honeywell Automation India 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.
Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Honeywell Automation India with six simple checks.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.