Market Participants Recognise Somi Conveyor Beltings Limited's (NSE:SOMICONVEY) Earnings Pushing Shares 29% Higher

Somi Conveyor Beltings Limited (NSE:SOMICONVEY) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 132% in the last year.

After such a large jump in price, Somi Conveyor Beltings' price-to-earnings (or "P/E") ratio of 43x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's exceedingly strong of late, Somi Conveyor Beltings has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Somi Conveyor Beltings

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 Somi Conveyor Beltings' earnings, revenue and cash flow.

Is There Enough Growth For Somi Conveyor Beltings?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. The latest three year period has also seen an excellent 167% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 26% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why Somi Conveyor Beltings is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Somi Conveyor Beltings' P/E?

Somi Conveyor Beltings' P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of Somi Conveyor Beltings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Somi Conveyor Beltings that we have uncovered.

If you're unsure about the strength of Somi Conveyor Beltings' 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.