Atal Realtech Limited's (NSE:ATALREAL) 29% Share Price Surge Not Quite Adding Up

Atal Realtech Limited (NSE:ATALREAL) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 143% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Atal Realtech as a stock to avoid entirely with its 59.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Atal Realtech certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Atal Realtech

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Atal Realtech's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 73% gain to the company's bottom line. EPS has also lifted 9.6% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Atal Realtech is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Atal Realtech's P/E?

The strong share price surge has got Atal Realtech's P/E rushing to great heights as well. 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.

We've established that Atal Realtech currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Atal Realtech (2 are concerning!) that you should be aware of.

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

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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.