There's Reason For Concern Over Mrs. Bectors Food Specialities Limited's (NSE:BECTORFOOD) Massive 34% Price Jump

Mrs. Bectors Food Specialities Limited (NSE:BECTORFOOD) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 71%.

After such a large jump in price, Mrs. Bectors Food Specialities may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 75.4x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Mrs. Bectors Food Specialities certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mrs. Bectors Food Specialities

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Mrs. Bectors Food Specialities would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. The latest three year period has also seen an excellent 99% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 20% each year, which is noticeably more attractive.

In light of this, it's alarming that Mrs. Bectors Food Specialities' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Mrs. Bectors Food Specialities' P/E?

The strong share price surge has got Mrs. Bectors Food Specialities' P/E rushing to great heights as well. 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.

We've established that Mrs. Bectors Food Specialities currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Mrs. Bectors Food Specialities with six simple checks on some of these key factors.

If you're unsure about the strength of Mrs. Bectors Food Specialities' 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.