Hindustan Aeronautics Limited (NSE:HAL) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

The Hindustan Aeronautics Limited (NSE:HAL) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 170% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Hindustan Aeronautics may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 40.8x, since almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Hindustan Aeronautics as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Hindustan Aeronautics' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Hindustan Aeronautics' to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow EPS by an impressive 116% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings growth is heading into negative territory, declining 3.8% over the next year. That's not great when the rest of the market is expected to grow by 24%.

In light of this, it's alarming that Hindustan Aeronautics' P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Hindustan Aeronautics' P/E

Hindustan Aeronautics' P/E is getting right up there since its shares have risen strongly. 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 Hindustan Aeronautics currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Hindustan Aeronautics has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Hindustan Aeronautics, 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.