Optimistic Investors Push Associated Alcohols & Breweries Limited (NSE:ASALCBR) Shares Up 28% But Growth Is Lacking

Associated Alcohols & Breweries Limited (NSE:ASALCBR) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 131% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Associated Alcohols & Breweries' price-to-earnings (or "P/E") ratio of 32.2x is worth a mention when the median P/E in India is similar at about 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been quite advantageous for Associated Alcohols & Breweries as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Associated Alcohols & Breweries

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 Associated Alcohols & Breweries' earnings, revenue and cash flow.

How Is Associated Alcohols & Breweries' Growth Trending?

In order to justify its P/E ratio, Associated Alcohols & Breweries would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 12% 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 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Associated Alcohols & Breweries is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate 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 the recent negative growth rates.

The Final Word

Associated Alcohols & Breweries' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Associated Alcohols & Breweries revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Associated Alcohols & Breweries with six simple checks.

If these risks are making you reconsider your opinion on Associated Alcohols & Breweries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.