Gujarat Raffia Industries Limited's (NSE:GUJRAFFIA) Shares Climb 35% But Its Business Is Yet to Catch Up

Gujarat Raffia Industries Limited (NSE:GUJRAFFIA) shareholders have had their patience rewarded with a 35% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

After such a large jump in price, Gujarat Raffia Industries' price-to-earnings (or "P/E") ratio of 49.3x 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 32x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

The earnings growth achieved at Gujarat Raffia 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 Gujarat Raffia Industries

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

Is There Enough Growth For Gujarat Raffia Industries?

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

Retrospectively, the last year delivered a decent 9.1% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 55% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's alarming that Gujarat Raffia Industries' 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.

What We Can Learn From Gujarat Raffia Industries' P/E?

Gujarat Raffia Industries' P/E is flying high just like its stock has during the last month. 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 Gujarat Raffia Industries currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

Having said that, be aware Gujarat Raffia Industries is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored.

You might be able to find a better investment than Gujarat Raffia Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.