Earnings Not Telling The Story For DRC Systems India Limited (NSE:DRCSYSTEMS) After Shares Rise 38%

DRC Systems India Limited (NSE:DRCSYSTEMS) shares have continued their recent momentum with a 38% gain in the last month alone. The last month tops off a massive increase of 103% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about DRC Systems India's P/E ratio of 29.7x, since the median price-to-earnings (or "P/E") ratio in India is also close to 31x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

DRC Systems India certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for DRC Systems India

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

The only time you'd be comfortable seeing a P/E like DRC Systems India's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that DRC Systems India's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now DRC Systems India's P/E is also back up to the market median. 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 DRC Systems India currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for DRC Systems India you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're unsure about the strength of DRC Systems India'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.