Market Might Still Lack Some Conviction On Anand Rathi Wealth Limited (NSE:ANANDRATHI) Even After 26% Share Price Boost

Anand Rathi Wealth Limited (NSE:ANANDRATHI) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Anand Rathi Wealth's P/E ratio of 21.9x, since the median price-to-earnings (or "P/E") ratio in India is also close to 23x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been quite advantageous for Anand Rathi Wealth as its earnings have been rising very briskly. 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.

See our latest analysis for Anand Rathi Wealth

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Anand Rathi Wealth's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. The latest three year period has also seen an excellent 154% overall rise in EPS, aided by its short-term performance. 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 24% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Anand Rathi Wealth is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On Anand Rathi Wealth's P/E

Anand Rathi Wealth's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Anand Rathi Wealth currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 1 warning sign for Anand Rathi Wealth that you need to take into consideration.

Of course, you might also be able to find a better stock than Anand Rathi Wealth. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.