Aarti Surfactants Limited (NSE:AARTISURF) Stocks Shoot Up 30% But Its P/E Still Looks Reasonable

Aarti Surfactants Limited (NSE:AARTISURF) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Following the firm bounce in price, Aarti Surfactants' price-to-earnings (or "P/E") ratio of 32.9x 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 26x and even P/E's below 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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For instance, Aarti Surfactants' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Aarti Surfactants

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 Aarti Surfactants' earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Aarti Surfactants would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 137% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Aarti Surfactants is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Aarti Surfactants' P/E?

Aarti Surfactants' P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Aarti Surfactants maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Aarti Surfactants (1 is a bit unpleasant!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Aarti Surfactants. 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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