Market Participants Recognise SMS Pharmaceuticals Limited's (NSE:SMSPHARMA) Earnings Pushing Shares 31% Higher

SMS Pharmaceuticals Limited (NSE:SMSPHARMA) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Following the firm bounce in price, SMS Pharmaceuticals' price-to-earnings (or "P/E") ratio of 36.4x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

The earnings growth achieved at SMS Pharmaceuticals over the last year would be more than acceptable for most companies. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for SMS Pharmaceuticals

Although there are no analyst estimates available for SMS Pharmaceuticals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For SMS Pharmaceuticals?

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

If we review the last year of earnings growth, the company posted a terrific increase of 26%. Pleasingly, EPS has also lifted 170% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why SMS Pharmaceuticals is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On SMS Pharmaceuticals' P/E

SMS Pharmaceuticals shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that SMS Pharmaceuticals maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

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

If these risks are making you reconsider your opinion on SMS Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.