Pudumjee Paper Products Limited (NSE:PDMJEPAPER) Soars 27% But It's A Story Of Risk Vs Reward

Despite an already strong run, Pudumjee Paper Products Limited (NSE:PDMJEPAPER) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 183% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Pudumjee Paper Products as a highly attractive investment with its 11.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been quite advantageous for Pudumjee Paper Products as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Pudumjee Paper Products

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

How Is Pudumjee Paper Products' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Pudumjee Paper Products' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 65% last year. The strong recent performance means it was also able to grow EPS by 227% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Pudumjee Paper Products' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Pudumjee Paper Products' P/E

Even after such a strong price move, Pudumjee Paper Products' P/E still trails the rest of the market significantly. 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.

Our examination of Pudumjee Paper Products revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Pudumjee Paper Products that you should be aware of.

Of course, you might also be able to find a better stock than Pudumjee Paper Products. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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