Associated Alcohols & Breweries Limited's (NSE:ASALCBR) 29% Share Price Surge Not Quite Adding Up

Associated Alcohols & Breweries Limited (NSE:ASALCBR) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The annual gain comes to 141% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Associated Alcohols & Breweries' P/E ratio of 34.6x, since the median price-to-earnings (or "P/E") ratio in India is also close to 33x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen firmly for Associated Alcohols & Breweries recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Associated Alcohols & Breweries

Although there are no analyst estimates available for Associated Alcohols & Breweries, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Associated Alcohols & Breweries' Growth Trending?

Associated Alcohols & Breweries' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 10% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 26% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Associated Alcohols & Breweries' P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 the recent negative growth rates.

The Final Word

Associated Alcohols & Breweries appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Associated Alcohols & Breweries currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Associated Alcohols & Breweries with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Associated Alcohols & Breweries. 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.