Bhageria Industries Limited's (NSE:BHAGERIA) 40% Share Price Surge Not Quite Adding Up

Bhageria Industries Limited (NSE:BHAGERIA) shares have continued their recent momentum with a 40% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 48%.

Since its price has surged higher, Bhageria Industries may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 44x, 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Bhageria Industries has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Bhageria Industries

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 Bhageria Industries' earnings, revenue and cash flow.

How Is Bhageria Industries' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 74% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 66% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 25% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Bhageria Industries' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Bhageria Industries' P/E

The large bounce in Bhageria Industries' shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Bhageria Industries revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Bhageria Industries (1 shouldn't be ignored!) that you should be aware of.

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.