Dolat Algotech Limited (NSE:DOLATALGO) Shares Fly 63% But Investors Aren't Buying For Growth

Dolat Algotech Limited (NSE:DOLATALGO) shareholders have had their patience rewarded with a 63% share price jump in the last month. The annual gain comes to 112% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Dolat Algotech's price-to-earnings (or "P/E") ratio of 12.4x might still make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 32x and even P/E's above 60x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Dolat Algotech 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 degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Dolat Algotech

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

Is There Any Growth For Dolat Algotech?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Dolat Algotech's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. As a result, it also grew EPS by 7.2% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Dolat Algotech is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Dolat Algotech's P/E?

Shares in Dolat Algotech are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Dolat Algotech maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Dolat Algotech that you should be aware 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.