Improved Earnings Required Before Garware Hi-Tech Films Limited (NSE:GRWRHITECH) Stock's 36% Jump Looks Justified

Despite an already strong run, Garware Hi-Tech Films Limited (NSE:GRWRHITECH) shares have been powering on, with a gain of 36% in the last thirty days. The annual gain comes to 233% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Garware Hi-Tech Films may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.9x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 65x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Garware Hi-Tech Films certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View 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.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Garware Hi-Tech Films would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 67% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Garware Hi-Tech Films is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Garware Hi-Tech Films' P/E?

The latest share price surge wasn't enough to lift Garware Hi-Tech Films' P/E close to the market median. 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.

We've established that Garware Hi-Tech Films maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Garware Hi-Tech Films (including 1 which is a bit concerning).

Of course, you might also be able to find a better stock than Garware Hi-Tech Films. So you may wish to see this free collection of other companies that have reasonable P/E ratios 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.