Earnings Not Telling The Story For Cochin Shipyard Limited (NSE:COCHINSHIP) After Shares Rise 32%

Cochin Shipyard Limited (NSE:COCHINSHIP) shares have continued their recent momentum with a 32% gain in the last month alone. This latest share price bounce rounds out a remarkable 369% gain over the last twelve months.

Since its price has surged higher, Cochin Shipyard may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.2x, since almost half of all companies in India have P/E ratios under 31x 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.

With earnings growth that's inferior to most other companies of late, Cochin Shipyard has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Cochin Shipyard

Keen to find out how analysts think Cochin Shipyard's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 4.5% gain to the company's bottom line. The latest three year period has also seen a 11% 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.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the four analysts following the company. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Cochin Shipyard's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Cochin Shipyard's P/E

The strong share price surge has got Cochin Shipyard's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Cochin Shipyard currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Cochin Shipyard you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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