GRP Limited (NSE:GRPLTD) Shares Slammed 27% But Getting In Cheap Might Be Difficult Regardless

GRP Limited (NSE:GRPLTD) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 248% in the last twelve months.

Even after such a large drop in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may still consider GRP as a stock to avoid entirely with its 72.3x 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.

With earnings growth that's exceedingly strong of late, GRP has been doing very well. 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 GRP

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on GRP will help you shine a light on its historical performance.

How Is GRP's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 69% last year. The latest three year period has also seen an excellent 283% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why GRP is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

Even after such a strong price drop, GRP's P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that GRP maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for GRP you should be aware of, and 1 of them can't be ignored.

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