Indo Tech Transformers Limited's (NSE:INDOTECH) P/E Is Still On The Mark Following 30% Share Price Bounce

Indo Tech Transformers Limited (NSE:INDOTECH) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 140% in the last year.

After such a large jump in price, Indo Tech Transformers may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Indo Tech Transformers certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Indo Tech Transformers

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Indo Tech Transformers would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 246% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Indo Tech Transformers' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Indo Tech Transformers' P/E?

Indo Tech Transformers shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Indo Tech Transformers maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Indo Tech Transformers you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.