Keystone Realtors Limited (NSE:RUSTOMJEE) stock could be in for a nasty surprise.

Given that nearly half of Indian companies have a price-to-earnings ratio (or 'P/E') of less than 31 times, you may want to consider the following. KEYSTONE REALTORS LIMITED. (NSE:RUSTOMJEE) has a P/E ratio of 51.3x, so it's a stock to avoid completely. Nevertheless, we need to dig a little deeper to determine whether there is a rational basis for the P/E ratio being so elevated.

Keystone Realtors is doing very well, with recent revenue growth being extremely strong. Many believe that the company will outperform other companies due to strong financial results in the future, and it appears that investors' desire to raise funds is increasing. If you don't hope so, you will end up paying a very high price for no particular reason.

Check out our latest analysis for Keystone Realtors.

We don't have analyst forecasts, but checking our forecasts will tell you how recent trends are setting up the company's future. free Keystone Realtors earnings, revenue, and cash flow report.

What do growth metrics tell us about a high P/E ratio?

There is an inherent assumption that for a P/E ratio like Keystone Realtors' to be considered reasonable, a company must significantly outperform the market.

First, looking back, we can see that the company grew its earnings per share by an impressive 205% over the last year. Despite this recent strong growth, it's still struggling to catch up, with three-year EPS contracting by a frustrating 55% overall. Therefore, shareholders would have been disappointed with the medium-term profit growth rate.

The company's downward momentum based on recent medium-term results is stark compared to a market that is expected to grow by 25% over the next 12 months.

With this in mind, it's concerning that Keystone Realtors' P/E ratio is higher than most other companies. Most investors seem to be ignoring the recent slow growth rate and hoping for an improvement in the company's earnings outlook. Only the boldest would think these prices are sustainable, as a continuation of recent earnings trends will likely ultimately weigh heavily on the stock.

Important points

The power of the price-to-earnings ratio is not primarily as a valuation tool, but rather as a gauge of current investor sentiment and future expectations.

Keystone Realtors' recent earnings have declined over the medium term, which means it is currently trading at a much higher P/E than expected. At this point, we're increasingly uncomfortable with the high P/E ratio, as it's very unlikely that this earnings performance will support such positive sentiment long-term. If recent medium-term earnings trends continue, shareholders' investments will be at significant risk and potential investors will be at risk of paying an excessive premium.

A company's balance sheet is another important area of ​​risk analysis.take a look at ours free Our balance sheet analysis for Keystone Realtors performs six simple checks on some of these important factors.

You may find a better investment than Keystone Realtors.If you would like to narrow down your list of candidates, please click here free A list of interesting companies that trade at low P/E ratios (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This 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 long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.