Indo Tech Transformers Limited's (NSE:INDOTECH) Share Price Is Still Matching Investor Opinion Despite 27% Slump

Indo Tech Transformers Limited (NSE:INDOTECH) shares have had a horrible month, losing 27% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 184%.

Although its price has dipped substantially, Indo Tech Transformers' price-to-earnings (or "P/E") ratio of 43.3x might still make it look like a 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 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been quite advantageous for Indo Tech Transformers 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.

View 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.

How Is Indo Tech Transformers' Growth Trending?

Indo Tech Transformers' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 320% in total over the last three years. 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 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?

There's still some solid strength behind Indo Tech Transformers' P/E, if not its share price lately. 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 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.

Before you settle on your opinion, we've discovered 3 warning signs for Indo Tech Transformers (1 is significant!) that you should be aware of.

Of course, you might also be able to find a better stock than Indo Tech Transformers. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.