D. P. Abhushan Limited (NSE:DPABHUSHAN) Looks Just Right With A 25% Price Jump

D. P. Abhushan Limited (NSE:DPABHUSHAN) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The annual gain comes to 186% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, D. P. Abhushan's price-to-earnings (or "P/E") ratio of 48.4x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 34x and even P/E's below 19x 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 as high as it is.

With earnings growth that's exceedingly strong of late, D. P. Abhushan has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for D. P. Abhushan

Although there are no analyst estimates available for D. P. Abhushan, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For D. P. Abhushan?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. Pleasingly, EPS has also lifted 147% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why D. P. Abhushan is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On D. P. Abhushan's P/E

D. P. Abhushan's P/E is getting right up there since its shares have risen strongly. 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.

We've established that D. P. Abhushan maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with D. P. Abhushan (at least 1 which can't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of D. P. Abhushan's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.