Investors Appear Satisfied With Suprajit Engineering Limited's (NSE:SUPRAJIT) Prospects As Shares Rocket 26%

The Suprajit Engineering Limited (NSE:SUPRAJIT) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Suprajit Engineering as a stock to potentially avoid with its 42.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Suprajit Engineering as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, 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.

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Is There Enough Growth For Suprajit Engineering?

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

Retrospectively, the last year delivered a decent 9.9% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 18% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 29% each year during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% each year, which is noticeably less attractive.

With this information, we can see why Suprajit Engineering is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Suprajit Engineering's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Suprajit Engineering maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Suprajit Engineering with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Suprajit Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com