Why Investors Shouldn't Be Surprised By Hind Rectifiers Limited's (NSE:HIRECT) 36% Share Price Surge

Despite an already strong run, Hind Rectifiers Limited (NSE:HIRECT) shares have been powering on, with a gain of 36% in the last thirty days. The annual gain comes to 125% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Hind Rectifiers' price-to-earnings (or "P/E") ratio of 79.2x 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 29x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Hind Rectifiers has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hind Rectifiers

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

Is There Enough Growth For Hind Rectifiers?

Hind Rectifiers' 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 the company grew earnings per share by an impressive 196% last year. Pleasingly, EPS has also lifted 359% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Hind Rectifiers is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Hind Rectifiers' P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hind Rectifiers maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hind Rectifiers (of which 1 is concerning!) you should know about.

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

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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.