Som Distilleries and Breweries Limited (NSE:SDBL) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Som Distilleries and Breweries Limited (NSE:SDBL) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that Som Distilleries and Breweries' price-to-earnings (or "P/E") ratio of 29.3x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's exceedingly strong of late, Som Distilleries and Breweries has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Som Distilleries and Breweries

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 Som Distilleries and Breweries' earnings, revenue and cash flow.

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 Som Distilleries and Breweries' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 335%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Som Distilleries and Breweries is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Som Distilleries and Breweries' P/E?

Som Distilleries and Breweries appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Som Distilleries and Breweries revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Som Distilleries and Breweries you should be aware of.

Of course, you might also be able to find a better stock than Som Distilleries and Breweries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.