What Atal Realtech Limited's (NSE:ATALREAL) 27% Share Price Gain Is Not Telling You

Atal Realtech Limited (NSE:ATALREAL) shares have continued their recent momentum with a 27% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 25% in the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Atal Realtech's P/E ratio of 36.2x, since the median price-to-earnings (or "P/E") ratio in India is also close to 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Earnings have risen at a steady rate over the last year for Atal Realtech, 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 Atal Realtech

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 Atal Realtech's earnings, revenue and cash flow.

How Is Atal Realtech's Growth Trending?

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

Retrospectively, the last year delivered a decent 5.9% gain to the company's bottom line. The latest three year period has also seen a 7.2% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Atal Realtech's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Atal Realtech's P/E

Atal Realtech's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Atal Realtech currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Atal Realtech is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

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.