Further Upside For WOL 3D India Limited (NSE:WOL3D) Shares Could Introduce Price Risks After 37% Bounce

WOL 3D India Limited (NSE:WOL3D) shares have had a really impressive month, gaining 37% after a shaky period beforehand. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 27x, you may still consider WOL 3D India as an attractive investment with its 19.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at WOL 3D India over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for WOL 3D India

Although there are no analyst estimates available for WOL 3D India, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

WOL 3D India's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 3.2% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 413% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that WOL 3D India is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

The latest share price surge wasn't enough to lift WOL 3D India's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that WOL 3D India currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for WOL 3D India you should be aware of, and 1 of them is significant.

Of course, you might also be able to find a better stock than WOL 3D India. 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.