There's Reason For Concern Over South West Pinnacle Exploration Limited's (NSE:SOUTHWEST) Massive 25% Price Jump

South West Pinnacle Exploration Limited (NSE:SOUTHWEST) shareholders have had their patience rewarded with a 25% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 8.0% isn't as attractive.

Since its price has surged higher, South West Pinnacle Exploration may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.7x, 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.

South West Pinnacle Exploration has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable 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 may be a little nervous about the viability of the share price.

View our latest analysis for South West Pinnacle Exploration

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

How Is South West Pinnacle Exploration's Growth Trending?

South West Pinnacle Exploration's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 3.7% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this information, we find it concerning that South West Pinnacle Exploration is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate 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 South West Pinnacle Exploration's P/E?

South West Pinnacle Exploration's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that South West Pinnacle Exploration currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 4 warning signs for South West Pinnacle Exploration (1 is potentially serious!) that you need to take into consideration.

If you're unsure about the strength of South West Pinnacle Exploration'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.