Silgo Retail Limited's (NSE:SILGO) 29% Price Boost Is Out Of Tune With Earnings

Silgo Retail Limited (NSE:SILGO) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 70% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Silgo Retail's price-to-earnings (or "P/E") ratio of 30.1x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 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.

Our free stock report includes 2 warning signs investors should be aware of before investing in Silgo Retail. Read for free now.

For example, consider that Silgo Retail's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Silgo Retail

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Silgo Retail will help you shine a light on its historical performance.

Is There Some Growth For Silgo Retail?

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

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 26% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Silgo Retail's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Silgo Retail's P/E?

Its shares have lifted substantially and now Silgo Retail's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Silgo Retail currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Silgo Retail that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.