A Piece Of The Puzzle Missing From Touchwood Entertainment Limited's (NSE:TOUCHWOOD) 40% Share Price Climb

Touchwood Entertainment Limited (NSE:TOUCHWOOD) shareholders have had their patience rewarded with a 40% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Even after such a large jump in price, Touchwood Entertainment's price-to-earnings (or "P/E") ratio of 24.7x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 30x and even P/E's above 57x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Touchwood Entertainment certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Touchwood Entertainment

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

Does Growth Match The Low P/E?

Touchwood Entertainment's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 80% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 111% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Touchwood Entertainment is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift Touchwood Entertainment's P/E close to the market median. 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 Touchwood Entertainment revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Touchwood Entertainment that you need to be mindful of.

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.