Power Mech Projects Limited's (NSE:POWERMECH) 28% Jump Shows Its Popularity With Investors

Power Mech Projects Limited (NSE:POWERMECH) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

After such a large jump in price, Power Mech Projects' price-to-earnings (or "P/E") ratio of 41.1x 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's inferior to most other companies of late, Power Mech Projects has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Power Mech Projects

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Power Mech Projects.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Power Mech Projects' 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 16%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 45% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 25%, which is noticeably less attractive.

In light of this, it's understandable that Power Mech Projects' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Power Mech Projects' P/E

Power Mech Projects shares have received a push in the right direction, but its P/E is elevated too. 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 Power Mech Projects maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Power Mech Projects that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

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