Subdued Growth No Barrier To Cool Caps Industries Limited (NSE:COOLCAPS) With Shares Advancing 28%

Despite an already strong run, Cool Caps Industries Limited (NSE:COOLCAPS) shares have been powering on, with a gain of 28% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Cool Caps Industries' price-to-earnings (or "P/E") ratio of 33.4x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 19x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Cool Caps Industries over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Cool Caps Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cool Caps Industries will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Cool Caps Industries would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Still, incredibly EPS has fallen 8.0% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's an unpleasant look.

In light of this, it's alarming that Cool Caps 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 Final Word

The strong share price surge has got Cool Caps Industries' P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Cool Caps 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.

It is also worth noting that we have found 4 warning signs for Cool Caps Industries (2 can't be ignored!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Cool Caps Industries. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.