Optimistic Investors Push Pattech Fitwell Tube Components Limited (NSE:PATTECH) Shares Up 26% But Growth Is Lacking

Pattech Fitwell Tube Components Limited (NSE:PATTECH) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 96% in the last year.

Since its price has surged higher, Pattech Fitwell Tube Components' price-to-earnings (or "P/E") ratio of 67.4x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Pattech Fitwell Tube Components 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.

See our latest analysis for Pattech Fitwell Tube Components

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 Pattech Fitwell Tube Components' earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Pattech Fitwell Tube Components' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 104%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Pattech Fitwell Tube Components' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Pattech Fitwell Tube Components' P/E?

Shares in Pattech Fitwell Tube Components have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Pattech Fitwell Tube Components currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Pattech Fitwell Tube Components you should be aware of, and 2 of them are concerning.

You might be able to find a better investment than Pattech Fitwell Tube Components. 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.