Shanthi Gears Limited's (NSE:SHANTIGEAR) 25% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Shanthi Gears Limited (NSE:SHANTIGEAR) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 89%.

After such a large jump in price, Shanthi Gears may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 63x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Shanthi Gears certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shanthi Gears

Keen to find out how analysts think Shanthi Gears' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shanthi Gears' Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Pleasingly, EPS has also lifted 629% in aggregate from three years ago, 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.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

In light of this, it's alarming that Shanthi Gears' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shanthi Gears' P/E is flying high just like its stock has during the last month. 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.

We've established that Shanthi Gears currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Shanthi Gears that you should be aware of.

You might be able to find a better investment than Shanthi Gears. 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.