Some Confidence Is Lacking In HEC Infra Projects Limited (NSE:HECPROJECT) As Shares Slide 25%

Unfortunately for some shareholders, the HEC Infra Projects Limited (NSE:HECPROJECT) share price has dived 25% in the last thirty days, prolonging recent pain. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, HEC Infra Projects may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45.2x, since almost half of all companies in India have P/E ratios under 20x and even P/E's lower than 10x are not unusual. 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.

Recent times have been quite advantageous for HEC Infra Projects as its earnings have been rising very briskly. 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.

Check out our latest analysis for HEC Infra Projects

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

How Is HEC Infra Projects' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like HEC Infra Projects' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 67% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 74% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that HEC Infra Projects' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Even after such a strong price drop, HEC Infra Projects' P/E still exceeds 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.

Our examination of HEC Infra Projects revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for HEC Infra Projects you should know about.

If you're unsure about the strength of HEC Infra Projects' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.