With A 26% Price Drop For Elin Electronics Limited (NSE:ELIN) You'll Still Get What You Pay For

To the annoyance of some shareholders, Elin Electronics Limited (NSE:ELIN) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Longer-term shareholders would now have taken a real hit with the stock declining 9.4% in the last year.

Even after such a large drop in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may still consider Elin Electronics as a stock to potentially avoid with its 42.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Elin Electronics certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Elin Electronics

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Does Growth Match The High P/E?

There's an inherent assumption that a company should 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. However, this wasn't enough as the latest three year period has seen a very unpleasant 67% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 146% as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 26% growth forecast for the broader market.

With this information, we can see why Elin Electronics is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

There's still some solid strength behind Elin Electronics' P/E, if not its share price lately. 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 Elin Electronics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 Elin Electronics is showing 1 warning sign in our investment analysis, you should know about.

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.