The Supreme Industries Limited's (NSE:SUPREMEIND) 29% Price Boost Is Out Of Tune With Earnings

The The Supreme Industries Limited (NSE:SUPREMEIND) share price has done very well over the last month, posting an excellent gain of 29%. The last 30 days bring the annual gain to a very sharp 95%.

Following the firm bounce in price, Supreme Industries' price-to-earnings (or "P/E") ratio of 64.1x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 31x and even P/E's below 17x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent earnings growth for Supreme Industries has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Supreme Industries

Keen to find out how analysts think Supreme Industries' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Supreme Industries' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 24%. EPS has also lifted 9.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 19% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 20% per year growth forecast for the broader market.

In light of this, it's curious that Supreme Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Supreme Industries' P/E

Supreme Industries' P/E is flying high just like its stock has during the last month. 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.

Our examination of Supreme Industries' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Supreme Industries with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Supreme Industries, 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.