Jainam Ferro Alloys (I) Limited's (NSE:JAINAM) 25% Share Price Surge Not Quite Adding Up

Explore Jainam Ferro Alloys (I)'s Fair Values from the Community and select yours

Jainam Ferro Alloys (I) Limited (NSE:JAINAM) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider Jainam Ferro Alloys (I) as a stock to potentially avoid with its 33.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Jainam Ferro Alloys (I) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Jainam Ferro Alloys (I)

Although there are no analyst estimates available for Jainam Ferro Alloys (I), 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 High P/E?

Jainam Ferro Alloys (I)'s P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 87%. Still, incredibly EPS has fallen 67% in total from three years ago, which is quite disappointing. 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 Jainam Ferro Alloys (I)'s 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.

The Final Word

The large bounce in Jainam Ferro Alloys (I)'s shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Jainam Ferro Alloys (I) currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

Having said that, be aware Jainam Ferro Alloys (I) is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If you're unsure about the strength of Jainam Ferro Alloys (I)'s 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.