There's Reason For Concern Over Garware Technical Fibres Limited's (NSE:GARFIBRES) Massive 25% Price Jump

Garware Technical Fibres Limited (NSE:GARFIBRES) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 42%.

After such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Garware Technical Fibres as a stock to avoid entirely with its 40.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent earnings growth for Garware Technical Fibres has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Garware Technical Fibres

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Garware Technical Fibres.

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

In order to justify its P/E ratio, Garware Technical Fibres would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 42% 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.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we find it concerning that Garware Technical Fibres is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The strong share price surge has got Garware Technical Fibres' P/E rushing to great heights as well. 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 Garware Technical Fibres currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very 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 Garware Technical Fibres with six simple checks on some of these key factors.

You might be able to find a better investment than Garware Technical Fibres. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.