Market Participants Recognise Dynamatic Technologies Limited's (NSE:DYNAMATECH) Earnings Pushing Shares 34% Higher

Dynamatic Technologies Limited (NSE:DYNAMATECH) shares have continued their recent momentum with a 34% gain in the last month alone. The annual gain comes to 160% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider Dynamatic Technologies as a stock to avoid entirely with its 62.4x 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.

Dynamatic Technologies certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Dynamatic Technologies

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dynamatic Technologies' earnings, revenue and cash flow.

Is There Enough Growth For Dynamatic Technologies?

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

Retrospectively, the last year delivered an exceptional 82% gain to the company's bottom line. Pleasingly, EPS has also lifted 219% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Dynamatic Technologies is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Dynamatic Technologies' P/E

The strong share price surge has got Dynamatic Technologies' P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Dynamatic Technologies revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Dynamatic Technologies (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of Dynamatic Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.