More Unpleasant Surprises Could Be In Store For Nalwa Sons Investments Limited's (NSE:NSIL) Shares After Tumbling 27%

Nalwa Sons Investments Limited (NSE:NSIL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 82%, which is great even in a bull market.

Even after such a large drop in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Nalwa Sons Investments as a stock to potentially avoid with its 36.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Nalwa Sons Investments has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nalwa Sons Investments

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nalwa Sons Investments' earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Nalwa Sons Investments would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 35% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Nalwa Sons Investments' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Despite the recent share price weakness, Nalwa Sons Investments' P/E remains higher than most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Nalwa Sons Investments 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. If recent medium-term earnings trends continue, it will place 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 1 warning sign with Nalwa Sons Investments, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Nalwa Sons Investments. 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.