There's Reason For Concern Over Black Box Limited's (NSE:BBOX) Massive 28% Price Jump

Black Box Limited (NSE:BBOX) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 126% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Black Box may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 57.5x, since almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. 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.

With earnings growth that's exceedingly strong of late, Black Box has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Black Box

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 Black Box's earnings, revenue and cash flow.

How Is Black Box's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 259%. The strong recent performance means it was also able to grow EPS by 103% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

In light of this, it's curious that Black Box's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Bottom Line On Black Box's P/E

Shares in Black Box have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Black Box currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Black Box.

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

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.