Vinny Overseas Limited's (NSE:VINNY) 33% Price Boost Is Out Of Tune With Earnings

Vinny Overseas Limited (NSE:VINNY) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 93% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Vinny Overseas' P/E ratio of 34.7x, since the median price-to-earnings (or "P/E") ratio in India is also close to 32x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Vinny Overseas certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Vinny Overseas

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 Vinny Overseas' earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Vinny Overseas' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 254%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

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.

In light of this, it's curious that Vinny Overseas' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Vinny Overseas' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Vinny Overseas currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Vinny Overseas.

If you're unsure about the strength of Vinny Overseas' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.