Earnings Not Telling The Story For Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) After Shares Rise 35%

Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) shares have continued their recent momentum with a 35% gain in the last month alone. The last month tops off a massive increase of 123% in the last year.

After such a large jump in price, Garden Reach Shipbuilders & Engineers' price-to-earnings (or "P/E") ratio of 47.5x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 26x and even P/E's below 15x are quite common. 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.

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With earnings growth that's superior to most other companies of late, Garden Reach Shipbuilders & Engineers has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Garden Reach Shipbuilders & Engineers

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Garden Reach Shipbuilders & Engineers.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Garden Reach Shipbuilders & Engineers would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 48%. Pleasingly, EPS has also lifted 178% in aggregate from three years ago, thanks to the last 12 months of growth. 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 18% each year during the coming three years according to the one analyst following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.

With this information, we find it concerning that Garden Reach Shipbuilders & Engineers 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. 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 Key Takeaway

The strong share price surge has got Garden Reach Shipbuilders & Engineers' 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.

Our examination of Garden Reach Shipbuilders & Engineers' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Garden Reach Shipbuilders & Engineers (of which 1 is a bit unpleasant!) you should know about.

You might be able to find a better investment than Garden Reach Shipbuilders & Engineers. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.