Earnings Not Telling The Story For Raghav Productivity Enhancers Limited (NSE:RPEL) After Shares Rise 26%

Raghav Productivity Enhancers Limited (NSE:RPEL) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, Raghav Productivity Enhancers may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77.7x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Raghav Productivity Enhancers as its earnings have been rising very briskly. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Raghav Productivity Enhancers

Although there are no analyst estimates available for Raghav Productivity Enhancers, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Raghav Productivity Enhancers would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. The strong recent performance means it was also able to grow EPS by 103% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 24% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that Raghav Productivity Enhancers' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Final Word

Raghav Productivity Enhancers' P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Raghav Productivity Enhancers revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Raghav Productivity Enhancers that you should be aware of.

If these risks are making you reconsider your opinion on Raghav Productivity Enhancers, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.