Why We're Not Concerned About Sky Gold Limited's (NSE:SKYGOLD) Share Price

With a price-to-earnings (or "P/E") ratio of 45.2x Sky Gold Limited (NSE:SKYGOLD) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Sky Gold 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.

Check out our latest analysis for Sky Gold

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Sky Gold's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 99%. Pleasingly, EPS has also lifted 377% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Sky Gold 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 Sky Gold's P/E?

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.

As we suspected, our examination of Sky Gold revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sky Gold (1 is concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Sky Gold, 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.