Earnings Not Telling The Story For DCM Shriram Limited (NSE:DCMSHRIRAM) After Shares Rise 33%

DCM Shriram Limited (NSE:DCMSHRIRAM) shareholders have had their patience rewarded with a 33% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

Following the firm bounce in price, DCM Shriram may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36.8x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x are not unusual. 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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With earnings growth that's exceedingly strong of late, DCM Shriram 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.

Check out our latest analysis for DCM Shriram

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 DCM Shriram's earnings, revenue and cash flow.

Is There Enough Growth For DCM Shriram?

The only time you'd be truly comfortable seeing a P/E as high as DCM Shriram's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. Still, incredibly EPS has fallen 43% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that DCM Shriram's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in DCM Shriram's shares has lifted the company's P/E to a fairly high level. 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 DCM Shriram 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware DCM Shriram is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

If you're unsure about the strength of DCM Shriram's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.