Shradha Infraprojects Limited (NSE:SHRADHA) Soars 27% But It's A Story Of Risk Vs Reward

Despite an already strong run, Shradha Infraprojects Limited (NSE:SHRADHA) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days were the cherry on top of the stock's 312% gain in the last year, which is nothing short of spectacular.

Even after such a large jump in price, Shradha Infraprojects' price-to-earnings (or "P/E") ratio of 19.3x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 63x 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 limited.

The earnings growth achieved at Shradha Infraprojects over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Shradha Infraprojects

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 Shradha Infraprojects' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Shradha Infraprojects' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. This was backed up an excellent period prior to see EPS up by 1,072% in total over the last three years. 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 26% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Shradha Infraprojects' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Shradha Infraprojects' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Shradha Infraprojects currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shradha Infraprojects (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Shradha Infraprojects. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.