Marksans Pharma Limited’s (NSE:MARKSANS) Shares May Have Run Too Fast Too Soon

It’s not a stretch to say that Marksans Pharma Limited’s (NSE:MARKSANS) price-to-earnings (or “P/E”) ratio of 22.2x right now seems quite “middle-of-the-road” compared to the market in India, where the median P/E ratio is around 25x. Although, it’s not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times haven’t been advantageous for Marksans Pharma as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Marksans Pharma

If you’d like to see what analysts are forecasting going forward, you should check out our free report on Marksans Pharma.

Does Growth Match The P/E?

In order to justify its P/E ratio, Marksans Pharma would need to produce growth that’s similar to the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 57% overall rise in EPS, in spite of its uninspiring short-term performance. Therefore, it’s fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% per annum, which is noticeably more attractive.

In light of this, it’s curious that Marksans Pharma’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

While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.

We’ve established that Marksans Pharma currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.

It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 1 warning sign with Marksans Pharma, and understanding should be part of your investment process.

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.