GI Engineering Solutions Limited's (NSE:GISOLUTION) Shares Climb 99% But Its Business Is Yet to Catch Up

GI Engineering Solutions Limited (NSE:GISOLUTION) shareholders would be excited to see that the share price has had a great month, posting a 99% gain and recovering from prior weakness. The last month tops off a massive increase of 196% in the last year.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 21x, you may consider GI Engineering Solutions as a stock to avoid entirely with its 51.4x 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 so lofty.

We'd have to say that with no tangible growth over the last year, GI Engineering Solutions' earnings have been unimpressive. It might be that many are expecting an improvement to the uninspiring earnings performance over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for GI Engineering Solutions

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on GI Engineering Solutions' earnings, revenue and cash flow.

Does Growth Match The High P/E?

GI Engineering Solutions' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

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

The Bottom Line On GI Engineering Solutions' P/E

Shares in GI Engineering Solutions have built up some good momentum lately, which has really inflated its P/E. 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 GI Engineering Solutions currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for GI Engineering Solutions that you should be aware of.

If these risks are making you reconsider your opinion on GI Engineering Solutions, explore our interactive list of high quality stocks to get an idea of what else is out there.

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