A Piece Of The Puzzle Missing From Pokarna Limited's (NSE:POKARNA) 29% Share Price Climb

Despite an already strong run, Pokarna Limited (NSE:POKARNA) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 101% in the last year.

In spite of the firm bounce in price, Pokarna's price-to-earnings (or "P/E") ratio of 27.1x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 62x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, Pokarna has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for Pokarna

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 Pokarna's earnings, revenue and cash flow.

Is There Any Growth For Pokarna?

The only time you'd be truly comfortable seeing a P/E as low as Pokarna's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 91% last year. Pleasingly, EPS has also lifted 154% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Pokarna is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Pokarna's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Pokarna currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Pokarna (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of Pokarna'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.