Why Investors Shouldn't Be Surprised By Parag Milk Foods Limited's (NSE:PARAGMILK) 29% Share Price Surge

Parag Milk Foods Limited (NSE:PARAGMILK) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 76% in the last year.

Following the firm bounce in price, Parag Milk Foods' price-to-earnings (or "P/E") ratio of 37.4x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Parag Milk Foods certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Parag Milk Foods

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

How Is Parag Milk Foods' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Parag Milk Foods' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 23% per year during the coming three years according to the lone analyst following the company. That's shaping up to be materially higher than the 20% each year growth forecast for the broader market.

With this information, we can see why Parag Milk Foods is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Parag Milk Foods' P/E

The large bounce in Parag Milk Foods' shares has lifted the company's P/E to a fairly high level. 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 Parag Milk Foods 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Parag Milk Foods you should be aware of, and 1 of them is a bit concerning.

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.