360 One Wam Limited's (NSE:360ONE) 25% Share Price Surge Not Quite Adding Up

Despite an already strong run, 360 One Wam Limited (NSE:360ONE) shares have been powering on, with a gain of 25% in the last thirty days. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, 360 One Wam's price-to-earnings (or "P/E") ratio of 44.2x 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 32x and even P/E's below 18x 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 as high as it is.

There hasn't been much to differentiate 360 One Wam's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for 360 One Wam

Want the full picture on analyst estimates for the company? Then our free report on 360 One Wam will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, 360 One Wam would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The latest three year period has also seen an excellent 110% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 17% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 22% per annum, which is noticeably more attractive.

In light of this, it's alarming that 360 One Wam's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From 360 One Wam's P/E?

The large bounce in 360 One Wam's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that 360 One Wam currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware 360 One Wam is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

You might be able to find a better investment than 360 One Wam. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com