Optimistic Investors Push Gujarat Raffia Industries Limited (NSE:GUJRAFFIA) Shares Up 29% But Growth Is Lacking

Despite an already strong run, Gujarat Raffia Industries Limited (NSE:GUJRAFFIA) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Gujarat Raffia Industries as a stock to avoid entirely with its 61.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

As an illustration, earnings have deteriorated at Gujarat Raffia Industries over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Gujarat Raffia Industries

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 Gujarat Raffia Industries' 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 far outperform the market for P/E ratios like Gujarat Raffia Industries' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 56% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% 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 Gujarat Raffia 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. 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 strong share price surge has got Gujarat Raffia Industries' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Gujarat Raffia 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. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Gujarat Raffia Industries (1 is potentially serious!) that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com