Investors Appear Satisfied With Prataap Snacks Limited's (NSE:DIAMONDYD) Prospects As Shares Rocket 25%

Prataap Snacks Limited (NSE:DIAMONDYD) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 28%.

Following the firm bounce in price, Prataap Snacks may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.2x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x 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.

Prataap Snacks could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Prataap Snacks

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Prataap Snacks.

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

The only time you'd be truly comfortable seeing a P/E as steep as Prataap Snacks' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 9.3% gain to the company's bottom line. Pleasingly, EPS has also lifted 161% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the two analysts watching the company. With the market only predicted to deliver 21% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Prataap Snacks' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Prataap Snacks' P/E

Shares in Prataap Snacks have built up some good momentum lately, which has really inflated its P/E. 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 Prataap Snacks maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Prataap Snacks.

You might be able to find a better investment than Prataap Snacks. 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.