Elecon Engineering Company Limited's (NSE:ELECON) Shares Climb 27% But Its Business Is Yet to Catch Up

Elecon Engineering Company Limited (NSE:ELECON) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 4.8% isn't as impressive.

After such a large jump in price, Elecon Engineering may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 31x, since almost half of all companies in India have P/E ratios under 26x and even P/E's lower than 14x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Elecon Engineering. View them for free.

With earnings growth that's inferior to most other companies of late, Elecon Engineering has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Elecon Engineering

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

How Is Elecon Engineering's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Elecon Engineering's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. The latest three year period has also seen an excellent 195% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we find it concerning that Elecon Engineering is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Elecon Engineering's P/E

Elecon Engineering shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Elecon Engineering's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Elecon Engineering is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Elecon Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.