Airo Lam Limited's (NSE:AIROLAM) 26% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Airo Lam Limited (NSE:AIROLAM) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, there still wouldn't be many who think Airo Lam's price-to-earnings (or "P/E") ratio of 30.2x is worth a mention when the median P/E in India is similar at about 32x. 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.

Recent times have been quite advantageous for Airo Lam as its earnings have been rising very briskly. 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.

View our latest analysis for Airo Lam

Although there are no analyst estimates available for Airo Lam, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Airo Lam's Growth Trending?

The only time you'd be comfortable seeing a P/E like Airo Lam's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The latest three year period has also seen an excellent 73% 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.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Airo Lam's P/E sits in line with the majority of other companies. 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. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Airo Lam's P/E?

Airo Lam appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Airo Lam currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Airo Lam (1 is concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Airo Lam, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.