Wonder Electricals Limited's (NSE:WEL) Shares Climb 27% But Its Business Is Yet to Catch Up

Despite an already strong run, Wonder Electricals Limited (NSE:WEL) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 103% in the last year.

Since its price has surged higher, Wonder Electricals' price-to-earnings (or "P/E") ratio of 63.9x 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Wonder Electricals has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Wonder Electricals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wonder Electricals will help you shine a light on its historical performance.

Is There Enough Growth For Wonder Electricals?

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

If we review the last year of earnings growth, the company posted a terrific increase of 86%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Wonder Electricals is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Wonder Electricals' P/E?

Shares in Wonder Electricals have built up some good momentum lately, which has really inflated its P/E. 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 Wonder Electricals currently trades on a much 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 high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Wonder Electricals (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of Wonder Electricals' 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.