GRM Overseas Limited's (NSE:GRMOVER) 29% Share Price Surge Not Quite Adding Up

Despite an already strong run, GRM Overseas Limited (NSE:GRMOVER) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 114% in the last year.

Following the firm bounce in price, GRM Overseas may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.7x, since almost half of all companies in India have P/E ratios under 24x and even P/E's lower than 14x 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 as high as it is.

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GRM Overseas has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for GRM Overseas

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 GRM Overseas' earnings, revenue and cash flow.

Is There Enough Growth For GRM Overseas?

The only time you'd be truly comfortable seeing a P/E as high as GRM Overseas' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 32% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that GRM Overseas' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On GRM Overseas' P/E

GRM Overseas' P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that GRM Overseas currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for GRM Overseas that you should be aware of.

If you're unsure about the strength of GRM Overseas' 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.