Market Participants Recognise CarTrade Tech Limited's (NSE:CARTRADE) Earnings Pushing Shares 30% Higher

CarTrade Tech Limited (NSE:CARTRADE) shareholders have had their patience rewarded with a 30% share price jump in the last month. The last month tops off a massive increase of 116% in the last year.

After such a large jump in price, CarTrade Tech's price-to-earnings (or "P/E") ratio of 57.5x 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 31x and even P/E's below 17x 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 advantageous for CarTrade Tech as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for CarTrade Tech

Want the full picture on analyst estimates for the company? Then our free report on CarTrade Tech will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

CarTrade Tech's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 124% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 94% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 35% each year as estimated by the five analysts watching the company. With the market only predicted to deliver 20% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that CarTrade Tech's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From CarTrade Tech's P/E?

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

We've established that CarTrade Tech maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for CarTrade Tech with six simple checks.

Of course, you might also be able to find a better stock than CarTrade Tech. 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.