Earnings Not Telling The Story For Aarey Drugs & Pharmaceuticals Limited (NSE:AAREYDRUGS) After Shares Rise 46%

Aarey Drugs & Pharmaceuticals Limited (NSE:AAREYDRUGS) shares have continued their recent momentum with a 46% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 54% in the last year.

Following the firm bounce in price, Aarey Drugs & Pharmaceuticals may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.3x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Aarey Drugs & Pharmaceuticals has been doing very well. It seems that many are expecting the strong 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 might be a little nervous about the viability of the share price.

See our latest analysis for Aarey Drugs & Pharmaceuticals

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 Aarey Drugs & Pharmaceuticals' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Aarey Drugs & Pharmaceuticals' 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 an exceptional 37% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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 Aarey Drugs & Pharmaceuticals 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. 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 Aarey Drugs & Pharmaceuticals' P/E?

Aarey Drugs & Pharmaceuticals' P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Aarey Drugs & Pharmaceuticals revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Aarey Drugs & Pharmaceuticals (1 makes us a bit uncomfortable) you should be aware of.

If these risks are making you reconsider your opinion on Aarey Drugs & Pharmaceuticals, 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.