Investors Appear Satisfied With Hi-Green Carbon Limited's (NSE:HIGREEN) Prospects As Shares Rocket 27%

Hi-Green Carbon Limited (NSE:HIGREEN) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 83% in the last year.

Following the firm bounce in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider Hi-Green Carbon as a stock to avoid entirely with its 73.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Hi-Green Carbon's receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for Hi-Green Carbon

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

How Is Hi-Green Carbon's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 8,047% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Hi-Green Carbon is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On Hi-Green Carbon's P/E

Hi-Green Carbon's P/E is flying high just like its stock has during the last month. 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.

We've established that Hi-Green Carbon maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Hi-Green Carbon (of which 3 are significant!) you should know about.

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

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

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.