Jyothy Labs Limited (NSE:JYOTHYLAB) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

The Jyothy Labs Limited (NSE:JYOTHYLAB) share price has done very well over the last month, posting an excellent gain of 31%. The last 30 days bring the annual gain to a very sharp 79%.

After such a large jump in price, Jyothy Labs may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.4x, 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.

Jyothy Labs certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Jyothy Labs

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

How Is Jyothy Labs' Growth Trending?

Jyothy Labs' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 54% gain to the company's bottom line. The latest three year period has also seen an excellent 85% overall rise in EPS, aided by its short-term performance. 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 14% each year during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 21% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Jyothy Labs is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Jyothy Labs' P/E?

Shares in Jyothy Labs have built up some good momentum lately, which has really inflated its P/E. 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 Jyothy Labs' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Jyothy Labs that we have uncovered.

You might be able to find a better investment than Jyothy Labs. 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.

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