Earnings Tell The Story For Anlon Technology Solutions Limited (NSE:ANLON) As Its Stock Soars 25%

Anlon Technology Solutions Limited (NSE:ANLON) shareholders have had their patience rewarded with a 25% share price jump in the last month. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Anlon Technology Solutions may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62x, since almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Anlon Technology Solutions' 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Anlon Technology Solutions

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

Is There Enough Growth For Anlon Technology Solutions?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Anlon Technology Solutions' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. Still, the latest three year period has seen an excellent 340% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why Anlon Technology Solutions 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.

What We Can Learn From Anlon Technology Solutions' P/E?

The strong share price surge has got Anlon Technology Solutions' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Anlon Technology Solutions maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Anlon Technology Solutions (at least 2 which can't be ignored), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Anlon Technology Solutions. 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.