After Leaping 26% Ashiana Housing Limited (NSE:ASHIANA) Shares Are Not Flying Under The Radar

Ashiana Housing Limited (NSE:ASHIANA) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 126% in the last year.

After such a large jump in price, Ashiana Housing's price-to-earnings (or "P/E") ratio of 53.8x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for Ashiana Housing as its earnings have been rising very briskly. The P/E is probably high because investors think this strong 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 Ashiana Housing

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 Ashiana Housing's earnings, revenue and cash flow.

How Is Ashiana Housing's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ashiana Housing's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 206%. The latest three year period has also seen an excellent 4,749% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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 Ashiana Housing 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 Ashiana Housing's P/E

Shares in Ashiana Housing have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Ashiana Housing revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Ashiana Housing you should be aware of.

You might be able to find a better investment than Ashiana Housing. 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.

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