Investors Appear Satisfied With Sonam Clock Limited's (NSE:SONAMCLOCK) Prospects As Shares Rocket 26%

Sonam Clock Limited (NSE:SONAMCLOCK) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 58%.

After such a large jump in price, Sonam Clock's price-to-earnings (or "P/E") ratio of 21.4x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Sonam Clock's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sonam Clock

Although there are no analyst estimates available for Sonam Clock, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Sonam Clock?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sonam Clock's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 154% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Sonam Clock's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Sonam Clock's P/E?

Sonam Clock's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Sonam Clock maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Sonam Clock is showing 6 warning signs in our investment analysis, and 3 of those are potentially serious.

If these risks are making you reconsider your opinion on Sonam Clock, 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. 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.
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