What NRB Bearings Limited's (NSE:NRBBEARING) 30% Share Price Gain Is Not Telling You

The NRB Bearings Limited (NSE:NRBBEARING) share price has done very well over the last month, posting an excellent gain of 30%. The annual gain comes to 128% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, NRB Bearings' price-to-earnings (or "P/E") ratio of 34.6x might 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 16x 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.

NRB Bearings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for NRB Bearings

Keen to find out how analysts think NRB Bearings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For NRB Bearings?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. The strong recent performance means it was also able to grow EPS by 773% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the only analyst following the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that NRB Bearings is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The large bounce in NRB Bearings' shares has lifted the company's P/E to a fairly high level. 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.

Our examination of NRB Bearings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for NRB Bearings that we have uncovered.

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.

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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.