Optimistic Investors Push Sansera Engineering Limited (NSE:SANSERA) Shares Up 26% But Growth Is Lacking

Those holding Sansera Engineering Limited (NSE:SANSERA) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Sansera Engineering may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.6x, since almost half of all companies in India have P/E ratios under 22x and even P/E's lower than 11x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Sansera Engineering could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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How Is Sansera Engineering's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Sansera Engineering's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 43% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings should grow by 12% over the next year. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Sansera Engineering's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Sansera Engineering shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Sansera Engineering's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Sansera Engineering that we have uncovered.

If you're unsure about the strength of Sansera Engineering's 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.