Earnings Not Telling The Story For Garware Hi-Tech Films Limited (NSE:GRWRHITECH) After Shares Rise 31%

The Garware Hi-Tech Films Limited (NSE:GRWRHITECH) share price has done very well over the last month, posting an excellent gain of 31%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 26x, you may consider Garware Hi-Tech Films as a stock to potentially avoid with its 30.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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We'd have to say that with no tangible growth over the last year, Garware Hi-Tech Films' earnings have been unimpressive. It might be that many are expecting an improvement to the uninspiring earnings performance over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Garware Hi-Tech Films

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

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Garware Hi-Tech Films' to be considered reasonable.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Although pleasingly EPS has lifted 73% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Garware Hi-Tech Films' 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

The large bounce in Garware Hi-Tech Films' 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 Garware Hi-Tech Films revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, 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.

Before you take the next step, you should know about the 1 warning sign for Garware Hi-Tech Films that we have uncovered.

If you're unsure about the strength of Garware Hi-Tech Films' 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.