Sonam Limited (NSE:SONAMLTD) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Sonam Limited (NSE:SONAMLTD) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 128% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Sonam's price-to-earnings (or "P/E") ratio of 62.1x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Sonam 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sonam

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 Sonam's earnings, revenue and cash flow.

Is There Enough Growth For Sonam?

In order to justify its P/E ratio, Sonam 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 59%. The latest three year period has also seen an excellent 37% overall rise in EPS, aided by its short-term performance. 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 26% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Sonam is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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

The strong share price surge has got Sonam's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Sonam revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

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