Shree Rama Multi-Tech Limited's (NSE:SHREERAMA) Shares Climb 38% But Its Business Is Yet to Catch Up

Shree Rama Multi-Tech Limited (NSE:SHREERAMA) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 95% 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 33x, you may consider Shree Rama Multi-Tech as a stock to potentially avoid with its 42.8x P/E ratio. 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.

Earnings have risen at a steady rate over the last year for Shree Rama Multi-Tech, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View 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?

Shree Rama Multi-Tech's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 5.7% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 38% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 25% 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. 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 Final Word

Shree Rama Multi-Tech shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

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. 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.

Before you take the next step, you should know about the 1 warning sign for Shree Rama Multi-Tech that we have uncovered.

You might be able to find a better investment than Shree Rama Multi-Tech. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com