Why Investors Shouldn't Be Surprised By Mangalam Cement Limited's (NSE:MANGLMCEM) 29% Share Price Surge

Mangalam Cement Limited (NSE:MANGLMCEM) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 198% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Mangalam Cement may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.7x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x 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 as high as it is.

Mangalam Cement certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Mangalam Cement

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mangalam Cement.

Is There Enough Growth For Mangalam Cement?

The only time you'd be truly comfortable seeing a P/E as high as Mangalam Cement's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 205% gain to the company's bottom line. Still, incredibly EPS has fallen 36% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 157% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 24%, which is noticeably less attractive.

With this information, we can see why Mangalam Cement is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Mangalam Cement's P/E?

Mangalam Cement's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Mangalam Cement's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Mangalam Cement is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Mangalam Cement. 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.