After Leaping 26% Waaree Renewable Technologies Limited (NSE:WAAREERTL) Shares Are Not Flying Under The Radar

Waaree Renewable Technologies Limited (NSE:WAAREERTL) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Waaree Renewable Technologies' 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 30x and even P/E's below 16x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Waaree Renewable Technologies certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

See our latest analysis for Waaree Renewable Technologies

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 Waaree Renewable Technologies' earnings, revenue and cash flow.

How Is Waaree Renewable Technologies' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 72%. The strong recent performance means it was also able to grow EPS by 1,269% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Waaree Renewable Technologies is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Waaree Renewable Technologies' P/E?

Waaree Renewable Technologies shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Waaree Renewable Technologies maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Waaree Renewable Technologies that we have uncovered.

If you're unsure about the strength of Waaree Renewable Technologies' 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.