Intellect Design Arena Limited (NSE:INTELLECT) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Intellect Design Arena Limited (NSE:INTELLECT) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 149% in the last year.

After such a large jump in price, Intellect Design Arena may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 44.6x, since almost half of all companies in India have P/E ratios under 31x 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 as high as it is.

There hasn't been much to differentiate Intellect Design Arena's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Intellect Design Arena

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Intellect Design Arena.

How Is Intellect Design Arena's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Intellect Design Arena's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The latest three year period has also seen an excellent 39% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is not materially different.

With this information, we find it interesting that Intellect Design Arena is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Intellect Design Arena's P/E?

Intellect Design Arena shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Intellect Design Arena's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Intellect Design Arena.

Of course, you might also be able to find a better stock than Intellect Design Arena. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.