After Leaping 27% Elin Electronics Limited (NSE:ELIN) Shares Are Not Flying Under The Radar

Those holding Elin Electronics Limited (NSE:ELIN) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.9% over the last year.

After such a large jump in price, Elin Electronics' price-to-earnings (or "P/E") ratio of 48.5x 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 27x and even P/E's below 15x 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.

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Elin Electronics certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Elin Electronics?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 67% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 146% over the next year. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Elin Electronics' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Elin Electronics' P/E

Shares in Elin Electronics 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.

We've established that Elin Electronics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Elin Electronics has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Elin Electronics' 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.