There's Reason For Concern Over Voltamp Transformers Limited's (NSE:VOLTAMP) Massive 26% Price Jump

Voltamp Transformers Limited (NSE:VOLTAMP) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last month tops off a massive increase of 159% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Voltamp Transformers' P/E ratio of 26.6x, since the median price-to-earnings (or "P/E") ratio in India is also close to 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Voltamp Transformers as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Voltamp Transformers

Want the full picture on analyst estimates for the company? Then our free report on Voltamp Transformers will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Voltamp Transformers would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 59% last year. The latest three year period has also seen an excellent 158% 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.

Turning to the outlook, the next three years should generate growth of 4.2% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Voltamp Transformers is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Voltamp Transformers' P/E

Voltamp Transformers' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Voltamp Transformers currently trades on a 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Voltamp Transformers with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.