Rico Auto Industries Limited (NSE:RICOAUTO) Stock Rockets 44% As Investors Are Less Pessimistic Than Expected

Rico Auto Industries Limited (NSE:RICOAUTO) shareholders have had their patience rewarded with a 44% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

Following the firm bounce in price, Rico Auto Industries may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.9x, since almost half of all companies in India have P/E ratios under 28x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Earnings have risen firmly for Rico Auto Industries recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Rico Auto Industries

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 Rico Auto Industries' earnings, revenue and cash flow.

Is There Enough Growth For Rico Auto Industries?

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

If we review the last year of earnings growth, the company posted a terrific increase of 28%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Rico Auto Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Rico Auto Industries' P/E is getting right up there since its shares have risen strongly. 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 Rico Auto Industries currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Rico Auto Industries (including 2 which don't sit too well with us).

If you're unsure about the strength of Rico Auto Industries' 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.