Sundaram Brake Linings Limited's (NSE:SUNDRMBRAK) P/E Is Still On The Mark Following 27% Share Price Bounce

The Sundaram Brake Linings Limited (NSE:SUNDRMBRAK) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 39%.

After such a large jump in price, Sundaram Brake Linings' price-to-earnings (or "P/E") ratio of 75.7x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 30x and even P/E's below 16x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For example, consider that Sundaram Brake Linings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sundaram Brake Linings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sundaram Brake Linings will help you shine a light on its historical performance.

Does Growth Match The High P/E?

Sundaram Brake Linings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 6,557% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Sundaram Brake Linings 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.

The Bottom Line On Sundaram Brake Linings' P/E

Sundaram Brake Linings' P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of Sundaram Brake Linings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 4 warning signs we've spotted with Sundaram Brake Linings (including 1 which is concerning).

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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.