D. P. Abhushan Limited (NSE:DPABHUSHAN) Stocks Shoot Up 36% But Its P/E Still Looks Reasonable

D. P. Abhushan Limited (NSE:DPABHUSHAN) shares have continued their recent momentum with a 36% gain in the last month alone. The last month tops off a massive increase of 255% in the last year.

After such a large jump in price, D. P. Abhushan's price-to-earnings (or "P/E") ratio of 50.3x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

It looks like earnings growth has deserted D. P. Abhushan recently, which is not something to boast about. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for D. P. Abhushan

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 D. P. Abhushan's earnings, revenue and cash flow.

Is There Enough Growth For D. P. Abhushan?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 104% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 24% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why D. P. Abhushan is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From D. P. Abhushan's P/E?

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

As we suspected, our examination of D. P. Abhushan revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for D. P. Abhushan that you should be aware of.

You might be able to find a better investment than D. P. Abhushan. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.