Further Upside For Emkay Taps and Cutting Tools Limited (NSE:EMKAYTOOLS) Shares Could Introduce Price Risks After 30% Bounce

Emkay Taps and Cutting Tools Limited (NSE:EMKAYTOOLS) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 140% in the last year.

Although its price has surged higher, Emkay Taps and Cutting Tools may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.5x, since almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 62x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Emkay Taps and Cutting Tools has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Emkay Taps and Cutting Tools

Although there are no analyst estimates available for Emkay Taps and Cutting Tools, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Emkay Taps and Cutting Tools' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 63% last year. Pleasingly, EPS has also lifted 202% 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.

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.

With this information, we find it odd that Emkay Taps and Cutting Tools is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Even after such a strong price move, Emkay Taps and Cutting Tools' P/E still trails the rest of the market significantly. 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 Emkay Taps and Cutting Tools currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Emkay Taps and Cutting Tools you should be aware of.

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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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.