Earnings Not Telling The Story For Rail Vikas Nigam Limited (NSE:RVNL) After Shares Rise 69%

Despite an already strong run, Rail Vikas Nigam Limited (NSE:RVNL) shares have been powering on, with a gain of 69% in the last thirty days. This latest share price bounce rounds out a remarkable 324% gain over the last twelve months.

Following the firm bounce in price, Rail Vikas Nigam may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43.5x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Rail Vikas Nigam 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.

See our latest analysis for Rail Vikas Nigam

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Rail Vikas Nigam.

Does Growth Match The High P/E?

Rail Vikas Nigam's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 9.4% gain to the company's bottom line. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 2.6% as estimated by the dual analysts watching the company. With the market predicted to deliver 25% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Rail Vikas Nigam is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Rail Vikas Nigam shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Rail Vikas Nigam's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these 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 Rail Vikas Nigam you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.