Selan Exploration Technology Limited's (NSE:SELAN) Shares Leap 28% Yet They're Still Not Telling The Full Story

Selan Exploration Technology Limited (NSE:SELAN) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 136% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Selan Exploration Technology's P/E ratio of 33.9x, since the median price-to-earnings (or "P/E") ratio in India is also close to 33x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

The recent earnings growth at Selan Exploration Technology would have to be considered satisfactory if not spectacular. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. 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 not quite in favour.

See our latest analysis for Selan Exploration Technology

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

How Is Selan Exploration Technology's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 6.1%. This was backed up an excellent period prior to see EPS up by 425% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Selan Exploration Technology 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 Selan Exploration Technology's P/E

Its shares have lifted substantially and now Selan Exploration Technology's P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Selan Exploration Technology revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. 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.

You always need to take note of risks, for example - Selan Exploration Technology has 3 warning signs we think you should be aware of.

If you're unsure about the strength of Selan Exploration Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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