HBL Power Systems Limited's (NSE:HBLPOWER) 41% Jump Shows Its Popularity With Investors

Despite an already strong run, HBL Power Systems Limited (NSE:HBLPOWER) shares have been powering on, with a gain of 41% in the last thirty days. The last 30 days were the cherry on top of the stock's 344% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider HBL Power Systems as a stock to avoid entirely with its 72.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, HBL Power Systems has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for HBL Power Systems

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on HBL Power Systems will help you shine a light on its historical performance.

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

In order to justify its P/E ratio, HBL Power Systems would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 82% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1,684% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why HBL Power Systems is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

The strong share price surge has got HBL Power Systems' P/E rushing to great heights as well. 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.

As we suspected, our examination of HBL Power Systems revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for HBL Power Systems that you need to be mindful 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.