Shakti Pumps (India) Limited's (NSE:SHAKTIPUMP) 44% Price Boost Is Out Of Tune With Earnings
The Shakti Pumps (India) Limited (NSE:SHAKTIPUMP) share price has done very well over the last month, posting an excellent gain of 44%. The last month tops off a massive increase of 236% in the last year.
Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Shakti Pumps (India) as a stock to avoid entirely with its 49.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Shakti Pumps (India) has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Shakti Pumps (India)
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shakti Pumps (India) will help you shine a light on its historical performance.How Is Shakti Pumps (India)'s Growth Trending?
In order to justify its P/E ratio, Shakti Pumps (India) would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Pleasingly, EPS has also lifted 39% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's alarming that Shakti Pumps (India)'s P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
Shares in Shakti Pumps (India) have built up some good momentum lately, which has really inflated its P/E. 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.
Our examination of Shakti Pumps (India) revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Shakti Pumps (India) has 1 warning sign we think you should be aware of.
If you're unsure about the strength of Shakti Pumps (India)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
About NSEI:SHAKTIPUMP
Shakti Pumps (India)
Engages in the manufacture, trade, and sale of pumps, motors, and their spare parts under the Shakti brand name in India and internationally.
Flawless balance sheet with solid track record.