Optimistic Investors Push Subros Limited (NSE:SUBROS) Shares Up 30% But Growth Is Lacking

The Subros Limited (NSE:SUBROS) share price has done very well over the last month, posting an excellent gain of 30%. The last 30 days bring the annual gain to a very sharp 29%.

After such a large jump in price, Subros may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 33.9x, since almost half of all companies in India have P/E ratios under 27x 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.

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With earnings growth that's superior to most other companies of late, Subros has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

In order to justify its P/E ratio, Subros would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 54% gain to the company's bottom line. The latest three year period has also seen an excellent 363% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 23% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% per annum, which is not materially different.

In light of this, it's curious that Subros' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Subros' shares has lifted the company's P/E to a fairly high level. 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 Subros' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Subros with six simple checks on some of these key factors.

If you're unsure about the strength of Subros' 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.