Subdued Growth No Barrier To Pitti Engineering Limited (NSE:PITTIENG) With Shares Advancing 39%

The Pitti Engineering Limited (NSE:PITTIENG) share price has done very well over the last month, posting an excellent gain of 39%. The last month tops off a massive increase of 217% in the last year.

After such a large jump in price, Pitti Engineering's price-to-earnings (or "P/E") ratio of 41.6x 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 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.

Pitti Engineering 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Pitti Engineering

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

How Is Pitti Engineering's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Pitti Engineering's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The latest three year period has also seen an excellent 214% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 28% over the next year. Meanwhile, the rest of the market is forecast to expand by 25%, which is not materially different.

With this information, we find it interesting that Pitti Engineering is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Pitti Engineering's P/E

Pitti Engineering's P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Pitti Engineering currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Pitti Engineering that you need to take into consideration.

Of course, you might also be able to find a better stock than Pitti Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com