Earnings Tell The Story For Precision Camshafts Limited (NSE:PRECAM) As Its Stock Soars 33%

Precision Camshafts Limited (NSE:PRECAM) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Precision Camshafts as a stock to potentially avoid with its 47x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The recent earnings growth at Precision Camshafts would have to be considered satisfactory if not spectacular. One possibility is that the P/E is high because investors think this good 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.

See our latest analysis for Precision Camshafts

Although there are no analyst estimates available for Precision Camshafts, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Precision Camshafts' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.8% last year. Pleasingly, EPS has also lifted 546% 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.

Comparing that to the market, which is only predicted to deliver 26% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why Precision Camshafts 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.

What We Can Learn From Precision Camshafts' P/E?

Precision Camshafts shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Precision Camshafts 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. 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 Precision Camshafts you should know about.

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