Subdued Growth No Barrier To CarTrade Tech Limited (NSE:CARTRADE) With Shares Advancing 29%

CarTrade Tech Limited (NSE:CARTRADE) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

After such a large jump in price, CarTrade Tech may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 73.1x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for CarTrade Tech as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for CarTrade Tech

Keen to find out how analysts think CarTrade Tech's future stacks up against the industry? In that case, our free report is a great place to start.

How Is CarTrade Tech's Growth Trending?

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 74% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 22% each year, which is not materially different.

In light of this, it's curious that CarTrade Tech's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On CarTrade Tech's P/E

The strong share price surge has got CarTrade Tech's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of CarTrade Tech's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for CarTrade Tech with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.