Optimistic Investors Push 360 One Wam Limited (NSE:360ONE) Shares Up 29% But Growth Is Lacking

360 One Wam Limited (NSE:360ONE) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 102% 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 37.5x 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 31x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

360 One Wam's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on 360 One Wam.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like 360 One Wam's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 112% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that 360 One Wam is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of 360 One Wam's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with 360 One Wam (at least 1 which is significant), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than 360 One Wam. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.