Thangamayil Jewellery Limited's (NSE:THANGAMAYL) P/E Is Still On The Mark Following 28% Share Price Bounce

Despite an already strong run, Thangamayil Jewellery Limited (NSE:THANGAMAYL) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

After such a large jump in price, Thangamayil Jewellery may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 50.4x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Thangamayil Jewellery has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Thangamayil Jewellery

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

In order to justify its P/E ratio, Thangamayil Jewellery would need to produce impressive growth in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 42% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 28% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 20% per annum, which is noticeably less attractive.

In light of this, it's understandable that Thangamayil Jewellery'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.

The Key Takeaway

The large bounce in Thangamayil Jewellery's shares has lifted the company's P/E to a fairly high level. 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 Thangamayil Jewellery's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Thangamayil Jewellery is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Thangamayil Jewellery, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.