Why Investors Shouldn't Be Surprised By PG Electroplast Limited's (NSE:PGEL) 26% Share Price Surge

PG Electroplast Limited (NSE:PGEL) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

Since its price has surged higher, PG Electroplast's price-to-earnings (or "P/E") ratio of 49.3x 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 31x and even P/E's below 17x are quite common. 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.

PG Electroplast 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 PG Electroplast

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

How Is PG Electroplast's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 52% as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

In light of this, it's understandable that PG Electroplast's 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 PG Electroplast's P/E

The strong share price surge has got PG Electroplast's P/E rushing to great heights as well. 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.

As we suspected, our examination of PG Electroplast's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for PG Electroplast you should be aware of.

If you're unsure about the strength of PG Electroplast'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.