A Piece Of The Puzzle Missing From The Indian Hume Pipe Company Limited's (NSE:INDIANHUME) 28% Share Price Climb

The The Indian Hume Pipe Company Limited (NSE:INDIANHUME) share price has done very well over the last month, posting an excellent gain of 28%. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Indian Hume Pipe's P/E ratio of 32.7x, since the median price-to-earnings (or "P/E") ratio in India is also close to 32x. 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.

Indian Hume Pipe hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Is There Some Growth For Indian Hume Pipe?

The only time you'd be comfortable seeing a P/E like Indian Hume Pipe's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. Even so, admirably EPS has lifted 59% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 30% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader market.

In light of this, it's curious that Indian Hume Pipe's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Indian Hume Pipe's P/E?

Indian Hume Pipe appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Indian Hume Pipe currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 3 warning signs for Indian Hume Pipe (1 is a bit unpleasant!) that you need to take into consideration.

If you're unsure about the strength of Indian Hume Pipe's 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.