A Piece Of The Puzzle Missing From Federal-Mogul Goetze (India) Limited's (NSE:FMGOETZE) 27% Share Price Climb

Despite an already strong run, Federal-Mogul Goetze (India) Limited (NSE:FMGOETZE) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 30%.

Although its price has surged higher, Federal-Mogul Goetze (India) may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.6x, since almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 57x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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The earnings growth achieved at Federal-Mogul Goetze (India) over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Federal-Mogul Goetze (India)

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 Federal-Mogul Goetze (India)'s earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Federal-Mogul Goetze (India) would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The latest three year period has also seen an excellent 200% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 23% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Federal-Mogul Goetze (India) is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Despite Federal-Mogul Goetze (India)'s shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Federal-Mogul Goetze (India) currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Federal-Mogul Goetze (India) with six simple checks on some of these key factors.

If you're unsure about the strength of Federal-Mogul Goetze (India)'s 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.