The Price Is Right For Premier Explosives Limited (NSE:PREMEXPLN) Even After Diving 27%

Premier Explosives Limited (NSE:PREMEXPLN) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 7.3% over the last twelve months.

In spite of the heavy fall in price, Premier Explosives' price-to-earnings (or "P/E") ratio of 56.5x might still make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 24x and even P/E's below 14x 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 so lofty.

Premier Explosives certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Premier Explosives

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 Premier Explosives' earnings, revenue and cash flow.

Is There Enough Growth For Premier Explosives?

The only time you'd be truly comfortable seeing a P/E as steep as Premier Explosives' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Pleasingly, EPS has also lifted 306% 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 25% shows it's noticeably more attractive on an annualised basis.

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

The Bottom Line On Premier Explosives' P/E

Premier Explosives' shares may have retreated, but its P/E is still flying high. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Premier Explosives maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Premier Explosives.

You might be able to find a better investment than Premier Explosives. 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.