Precision Wires India Limited's (NSE:PRECWIRE) P/E Is Still On The Mark Following 27% Share Price Bounce

Precision Wires India Limited (NSE:PRECWIRE) shareholders have had their patience rewarded with a 27% share price jump in the last month. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Precision Wires India as a stock to potentially avoid with its 45.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Precision Wires India over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Precision Wires India

Although there are no analyst estimates available for Precision Wires India, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Precision Wires India's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 141% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Precision Wires India's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Precision Wires India shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Precision Wires India revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Precision Wires India 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.