What Rajshree Polypack Limited's (NSE:RPPL) 27% Share Price Gain Is Not Telling You

The Rajshree Polypack Limited (NSE:RPPL) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Rajshree Polypack as a stock to potentially avoid with its 39.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Rajshree Polypack over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Rajshree Polypack

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

Is There Enough Growth For Rajshree Polypack?

In order to justify its P/E ratio, Rajshree Polypack would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently 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 less attractive on an annualised basis.

In light of this, it's alarming that Rajshree Polypack's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Rajshree Polypack shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Rajshree Polypack revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 5 warning signs for Rajshree Polypack you should be aware of, and 2 of them can't be ignored.

If you're unsure about the strength of Rajshree Polypack'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.