Investors Still Aren't Entirely Convinced By Rane Engine Valve Limited's (NSE:RANEENGINE) Earnings Despite 47% Price Jump

Rane Engine Valve Limited (NSE:RANEENGINE) shareholders have had their patience rewarded with a 47% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 85%.

Although its price has surged higher, there still wouldn't be many who think Rane Engine Valve's price-to-earnings (or "P/E") ratio of 34x is worth a mention when the median P/E in India is similar at about 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been quite advantageous for Rane Engine Valve as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Rane Engine Valve

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 Rane Engine Valve's earnings, revenue and cash flow.

Does Growth Match The P/E?

In order to justify its P/E ratio, Rane Engine Valve would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 139%. Pleasingly, EPS has also lifted 154% 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.

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 find it interesting that Rane Engine Valve is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

Rane Engine Valve appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Rane Engine Valve revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Rane Engine Valve (1 can't be ignored) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.