The Market Lifts De Neers Tools Limited (NSE:DENEERS) Shares 26% But It Can Do More

De Neers Tools Limited (NSE:DENEERS) shares have had a really impressive month, gaining 26% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, De Neers Tools may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.2x, since almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 66x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, De Neers Tools' receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for De Neers Tools

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 De Neers Tools' earnings, revenue and cash flow.

Is There Any Growth For De Neers Tools?

In order to justify its P/E ratio, De Neers Tools would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 868% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

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.

In light of this, it's peculiar that De Neers Tools' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From De Neers Tools' P/E?

Despite De Neers Tools' shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of De Neers Tools revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 3 warning signs for De Neers Tools (2 are significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on De Neers Tools, 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.