Shaily Engineering Plastics Limited's (NSE:SHAILY) 25% Price Boost Is Out Of Tune With Earnings

Shaily Engineering Plastics Limited (NSE:SHAILY) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 37%.

After such a large jump in price, Shaily Engineering Plastics may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 47.2x, since almost half of all companies in India have P/E ratios under 32x 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, Shaily Engineering Plastics 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.

Check out our latest analysis for Shaily Engineering Plastics

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How Is Shaily Engineering Plastics' Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 3.1%. This was backed up an excellent period prior to see EPS up by 102% in total over the last three years. 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 growth is heading into negative territory, declining 13% over the next year. Meanwhile, the broader market is forecast to expand by 25%, which paints a poor picture.

In light of this, it's alarming that Shaily Engineering Plastics' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

What We Can Learn From Shaily Engineering Plastics' P/E?

The large bounce in Shaily Engineering Plastics' shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Shaily Engineering Plastics' analyst forecasts revealed that its outlook for shrinking earnings 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 are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Shaily Engineering Plastics (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Shaily Engineering Plastics. 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.