LGB Forge Limited (NSE:LGBFORGE) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 166% in the last twelve months.
In spite of the heavy fall in price, LGB Forge may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.8x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
LGB Forge certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.free report on LGB Forge will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
LGB Forge's 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.
If we review the last year of earnings growth, the company posted a terrific increase of 365%. The strong recent performance means it was also able to grow EPS by 212% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that LGB Forge's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Bottom Line On LGB Forge's P/E
Even after such a strong price drop, LGB Forge's P/E still exceeds the rest of the market significantly. 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.
As we suspected, our examination of LGB Forge revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
It is also worth noting that we have found 2 warning signs for LGB Forge that you need to take into consideration.
If you're unsure about the strength of LGB Forge's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.