Optimistic Investors Push Shree Rama Multi-Tech Limited (NSE:SHREERAMA) Shares Up 48% But Growth Is Lacking

The Shree Rama Multi-Tech Limited (NSE:SHREERAMA) share price has done very well over the last month, posting an excellent gain of 48%. The last 30 days bring the annual gain to a very sharp 43%.

Following the firm bounce in price, Shree Rama Multi-Tech may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 42.9x, since almost half of all companies in India have P/E ratios under 33x and even P/E's lower than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

We'd have to say that with no tangible growth over the last year, Shree Rama Multi-Tech's earnings have been unimpressive. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shree Rama Multi-Tech

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 Shree Rama Multi-Tech's earnings, revenue and cash flow.

Is There Enough Growth For Shree Rama Multi-Tech?

In order to justify its P/E ratio, Shree Rama Multi-Tech would need to produce impressive growth in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow EPS by an impressive 40% 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 predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Shree Rama Multi-Tech is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Shree Rama Multi-Tech's P/E?

Shree Rama Multi-Tech's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Shree Rama Multi-Tech currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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 always need to take note of risks, for example - Shree Rama Multi-Tech has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Shree Rama Multi-Tech'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.