What Hindustan Aeronautics Limited's (NSE:HAL) 30% Share Price Gain Is Not Telling You

Hindustan Aeronautics Limited (NSE:HAL) shares have continued their recent momentum with a 30% gain in the last month alone. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that Hindustan Aeronautics' price-to-earnings (or "P/E") ratio of 30.6x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times haven't been advantageous for Hindustan Aeronautics as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Hindustan Aeronautics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hindustan Aeronautics.

How Is Hindustan Aeronautics' Growth Trending?

In order to justify its P/E ratio, Hindustan Aeronautics would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.7% last year. The latest three year period has also seen an excellent 146% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.4% each year during the coming three years according to the ten analysts following the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Hindustan Aeronautics is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Hindustan Aeronautics' P/E

Hindustan Aeronautics' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Hindustan Aeronautics currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Hindustan Aeronautics has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Hindustan Aeronautics. 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.