What Indian Renewable Energy Development Agency Limited's (NSE:IREDA) 32% Share Price Gain Is Not Telling You

Indian Renewable Energy Development Agency Limited (NSE:IREDA) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Indian Renewable Energy Development Agency as a stock to potentially avoid with its 47.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Indian Renewable Energy Development Agency certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Indian Renewable Energy Development Agency

Although there are no analyst estimates available for Indian Renewable Energy Development Agency, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Indian Renewable Energy Development Agency?

There's an inherent assumption that a company should outperform the market for P/E ratios like Indian Renewable Energy Development Agency's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. EPS has also lifted 5.5% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Indian Renewable Energy Development Agency is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Indian Renewable Energy Development Agency's P/E

Indian Renewable Energy Development Agency shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Indian Renewable Energy Development Agency revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Indian Renewable Energy Development Agency (2 shouldn't be ignored!) that you should be aware of.

You might be able to find a better investment than Indian Renewable Energy Development Agency. 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).

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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.

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