More Unpleasant Surprises Could Be In Store For Niraj Cement Structurals Limited's (NSE:NIRAJ) Shares After Tumbling 26%

Niraj Cement Structurals Limited (NSE:NIRAJ) shares have had a horrible month, losing 26% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 55% in the last year.

Even after such a large drop in price, Niraj Cement Structurals' price-to-earnings (or "P/E") ratio of 32.1x 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 28x and even P/E's below 15x 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.

With earnings growth that's exceedingly strong of late, Niraj Cement Structurals has been doing very well. 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.

View our latest analysis for Niraj Cement Structurals

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Niraj Cement Structurals' earnings, revenue and cash flow.

How Is Niraj Cement Structurals' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Niraj Cement Structurals' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line. Pleasingly, EPS has also lifted 65% 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.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Niraj Cement Structurals' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Despite the recent share price weakness, Niraj Cement Structurals' P/E remains higher than 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 Niraj Cement Structurals currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Niraj Cement Structurals that you should be aware of.

You might be able to find a better investment than Niraj Cement Structurals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.