Optimistic Investors Push Power & Instrumental (Gujarat) Limited (NSE:PIGL) Shares Up 31% But Growth Is Lacking

Despite an already strong run, Power & Instrumental (Gujarat) Limited (NSE:PIGL) shares have been powering on, with a gain of 31% in the last thirty days. The last 30 days were the cherry on top of the stock's 482% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, Power & Instrumental (Gujarat)'s price-to-earnings (or "P/E") ratio of 45.2x 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 33x and even P/E's below 19x 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.

Power & Instrumental (Gujarat) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Power & Instrumental (Gujarat)

Although there are no analyst estimates available for Power & Instrumental (Gujarat), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Power & Instrumental (Gujarat)'s Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Power & Instrumental (Gujarat)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. As a result, it also grew EPS by 5.8% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Power & Instrumental (Gujarat) is trading at a P/E higher than the market. 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 Final Word

The large bounce in Power & Instrumental (Gujarat)'s 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 Power & Instrumental (Gujarat) 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 2 warning signs for Power & Instrumental (Gujarat) you should be aware of, and 1 of them is a bit unpleasant.

If you're unsure about the strength of Power & Instrumental (Gujarat)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.