Paramount Communications Limited (NSE:PARACABLES) Stocks Shoot Up 31% But Its P/E Still Looks Reasonable

Paramount Communications Limited (NSE:PARACABLES) shareholders are no doubt pleased to see that the share price has bounced 31% 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, Paramount Communications may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36.9x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. 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 Paramount Communications 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Paramount Communications

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 Paramount Communications' earnings, revenue and cash flow.

Is There Enough Growth For Paramount Communications?

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

If we review the last year of earnings growth, the company posted a terrific increase of 53%. Pleasingly, EPS has also lifted 625% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Paramount Communications is trading at such a high P/E compared to the market. 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 Paramount Communications' P/E?

The large bounce in Paramount Communications' shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Paramount Communications 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Paramount Communications (1 is concerning) you should be aware of.

If these risks are making you reconsider your opinion on Paramount Communications, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.