Wheels India Limited (NSE:WHEELS) Stock Rockets 26% But Many Are Still Ignoring The Company

Wheels India Limited (NSE:WHEELS) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, it's still not a stretch to say that Wheels India's price-to-earnings (or "P/E") ratio of 28.5x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen at a steady rate over the last year for Wheels India, which is generally not a bad outcome. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Wheels India

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 Wheels India's earnings, revenue and cash flow.

Does Growth Match The P/E?

In order to justify its P/E ratio, Wheels India would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. The latest three year period has also seen an excellent 3,297% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Wheels India's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Wheels India appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

We've established that Wheels India currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 2 warning signs for Wheels India (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of Wheels India'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.