Further Upside For Eimco Elecon (India) Limited (NSE:EIMCOELECO) Shares Could Introduce Price Risks After 27% Bounce

Eimco Elecon (India) Limited (NSE:EIMCOELECO) shares have had a really impressive month, gaining 27% after a shaky period beforehand. This latest share price bounce rounds out a remarkable 380% gain over the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Eimco Elecon (India)'s price-to-earnings (or "P/E") ratio of 30.5x is worth a mention when the median P/E in India is similar at about 30x. 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.

Recent times have been quite advantageous for Eimco Elecon (India) as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

Check out our latest analysis for Eimco Elecon (India)

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

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Eimco Elecon (India) would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 148% last year. Pleasingly, EPS has also lifted 175% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 24% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's curious that Eimco Elecon (India)'s P/E sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Eimco Elecon (India)'s P/E?

Its shares have lifted substantially and now Eimco Elecon (India)'s P/E is also back up to the market median. 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 Eimco Elecon (India) currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Eimco Elecon (India) you should know about.

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.