eClerx Services Limited's (NSE:ECLERX) 31% Price Boost Is Out Of Tune With Earnings

eClerx Services Limited (NSE:ECLERX) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 39%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about eClerx Services' P/E ratio of 28.5x, since the median price-to-earnings (or "P/E") ratio in India is also close to 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times haven't been advantageous for eClerx Services as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for eClerx Services

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Is There Some Growth For eClerx Services?

There's an inherent assumption that a company should be matching the market for P/E ratios like eClerx Services' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 7.6%. The latest three year period has also seen an excellent 39% overall rise in EPS, aided somewhat by its short-term performance. 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 16% per annum during the coming three years according to the ten analysts following the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

With this information, we find it interesting that eClerx Services is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

eClerx Services' 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.

Our examination of eClerx Services' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. 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. Take a look at our free balance sheet analysis for eClerx Services with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on eClerx Services, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.