Godfrey Phillips India Limited's (NSE:GODFRYPHLP) Shares Leap 39% Yet They're Still Not Telling The Full Story

Despite an already strong run, Godfrey Phillips India Limited (NSE:GODFRYPHLP) shares have been powering on, with a gain of 39% in the last thirty days. The last month tops off a massive increase of 170% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Godfrey Phillips India's price-to-earnings (or "P/E") ratio of 35.5x is worth a mention when the median P/E in India is similar at about 33x. 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.

Godfrey Phillips India could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Godfrey Phillips India

Keen to find out how analysts think Godfrey Phillips India's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Retrospectively, the last year delivered a decent 6.9% gain to the company's bottom line. Pleasingly, EPS has also lifted 98% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 25% each year during the coming three years according to the sole analyst following the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we find it interesting that Godfrey Phillips India is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Godfrey Phillips India's P/E

Godfrey Phillips India's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Godfrey Phillips India currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Godfrey Phillips India you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.