Market Participants Recognise India Nippon Electricals Limited's (NSE:INDNIPPON) Earnings Pushing Shares 35% Higher

India Nippon Electricals Limited (NSE:INDNIPPON) shares have continued their recent momentum with a 35% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 95%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about India Nippon Electricals' P/E ratio of 30.3x, since the median price-to-earnings (or "P/E") ratio in India is also close to 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

The earnings growth achieved at India Nippon Electricals over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for India Nippon Electricals

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like India Nippon Electricals' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. Pleasingly, EPS has also lifted 92% in aggregate from three years ago, partly 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.

It's interesting to note that the rest of the market is similarly expected to grow by 25% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why India Nippon Electricals is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.

The Bottom Line On India Nippon Electricals' P/E

Its shares have lifted substantially and now India Nippon Electricals' P/E is also back up to the market median. 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.

As we suspected, our examination of India Nippon Electricals revealed its three-year earnings trends are contributing to its P/E, given they look similar to current market expectations. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for India Nippon Electricals (1 is a bit concerning!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.