Sumit Woods Limited's (NSE:SUMIT) Share Price Boosted 42% But Its Business Prospects Need A Lift Too

Despite an already strong run, Sumit Woods Limited (NSE:SUMIT) shares have been powering on, with a gain of 42% in the last thirty days. The last 30 days bring the annual gain to a very sharp 55%.

In spite of the firm bounce in price, Sumit Woods may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.8x, since almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 55x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Sumit Woods certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Sumit Woods

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

How Is Sumit Woods' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Sumit Woods' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 154% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Sumit Woods is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Sumit Woods' P/E

Sumit Woods' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

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

Having said that, be aware Sumit Woods is showing 3 warning signs in our investment analysis, and 2 of those are significant.

Of course, you might also be able to find a better stock than Sumit Woods. 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.