There's Reason For Concern Over Gufic Biosciences Limited's (NSE:GUFICBIO) Massive 26% Price Jump

Gufic Biosciences Limited (NSE:GUFICBIO) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 79%.

Following the firm bounce in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Gufic Biosciences as a stock to avoid entirely with its 54.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Gufic Biosciences has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable 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.

See our latest analysis for Gufic Biosciences

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

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.2% last year. EPS has also lifted 9.1% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Gufic Biosciences' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

The Bottom Line On Gufic Biosciences' P/E

The strong share price surge has got Gufic Biosciences' P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Gufic Biosciences 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. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Gufic Biosciences.

You might be able to find a better investment than Gufic Biosciences. 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.