Rajoo Engineers Limited's (NSE:RAJOOENG) Stock Retreats 28% But Earnings Haven't Escaped The Attention Of Investors

Explore Rajoo Engineers's Fair Values from the Community and select yours

Rajoo Engineers Limited (NSE:RAJOOENG) shares have had a horrible month, losing 28% after a relatively good period beforehand. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, Rajoo Engineers may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.4x, since almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x are not unusual. 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.

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With earnings growth that's exceedingly strong of late, Rajoo Engineers has been doing very well. 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.

Check out our latest analysis for Rajoo Engineers

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 Rajoo Engineers' earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 99% gain to the company's bottom line. Pleasingly, EPS has also lifted 178% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those 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.

With this information, we can see why Rajoo Engineers is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Rajoo Engineers' P/E?

There's still some solid strength behind Rajoo Engineers' P/E, if not its share price lately. 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.

As we suspected, our examination of Rajoo Engineers 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Rajoo Engineers you should know about.

You might be able to find a better investment than Rajoo Engineers. 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.