Amara Raja Energy & Mobility Limited's (NSE:ARE&M) Shares Bounce 28% But Its Business Still Trails The Market

Despite an already strong run, Amara Raja Energy & Mobility Limited (NSE:ARE&M) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 124% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Amara Raja Energy & Mobility's price-to-earnings (or "P/E") ratio of 27.5x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 31x and even P/E's above 61x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Amara Raja Energy & Mobility certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Amara Raja Energy & Mobility's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 26%. The strong recent performance means it was also able to grow EPS by 35% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 21% per year, which is noticeably more attractive.

In light of this, it's understandable that Amara Raja Energy & Mobility's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Despite Amara Raja Energy & Mobility's shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Amara Raja Energy & Mobility maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Amara Raja Energy & Mobility that you need to be mindful of.

If these risks are making you reconsider your opinion on Amara Raja Energy & Mobility, explore our interactive list of high quality stocks to get an idea of what else is out there.

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