Shemaroo Entertainment Limited's (NSE:SHEMAROO) 25% Price Boost Is Out Of Tune With Earnings

Shemaroo Entertainment Limited (NSE:SHEMAROO) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

Following the firm bounce in price, Shemaroo Entertainment may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55.3x, since almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Shemaroo Entertainment recently, which is pleasing to see. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shemaroo Entertainment

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

Does Growth Match The High P/E?

Shemaroo Entertainment's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Shemaroo Entertainment'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 Final Word

Shares in Shemaroo Entertainment have built up some good momentum lately, which has really inflated its P/E. 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 Shemaroo Entertainment 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. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Shemaroo Entertainment has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.