Creative Graphics Solutions India Limited's (NSE:CGRAPHICS) 30% Jump Shows Its Popularity With Investors

The Creative Graphics Solutions India Limited (NSE:CGRAPHICS) share price has done very well over the last month, posting an excellent gain of 30%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may consider Creative Graphics Solutions India as a stock to potentially avoid with its 44.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Creative Graphics Solutions India certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Creative Graphics Solutions India

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

How Is Creative Graphics Solutions India's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 86% gain to the company's bottom line. Pleasingly, EPS has also lifted 222% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Creative Graphics Solutions India's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

Creative Graphics Solutions India shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Creative Graphics Solutions India revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. 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 3 warning signs with Creative Graphics Solutions India (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.