There's Reason For Concern Over Jagsonpal Pharmaceuticals Limited's (NSE:JAGSNPHARM) Massive 27% Price Jump

Those holding Jagsonpal Pharmaceuticals Limited (NSE:JAGSNPHARM) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 2.6% isn't as impressive.

Since its price has surged higher, Jagsonpal Pharmaceuticals may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.9x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x 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.

Jagsonpal Pharmaceuticals has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Jagsonpal 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 Jagsonpal Pharmaceuticals' earnings, revenue and cash flow.

Is There Enough Growth For Jagsonpal Pharmaceuticals?

The only time you'd be truly comfortable seeing a P/E as high as Jagsonpal Pharmaceuticals' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 9.7% gain to the company's bottom line. The latest three year period has also seen an excellent 80% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Jagsonpal Pharmaceuticals' 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. 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 Jagsonpal Pharmaceuticals' P/E

Jagsonpal Pharmaceuticals shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Jagsonpal Pharmaceuticals currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Jagsonpal Pharmaceuticals that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.