Why We're Not Concerned Yet About Globe International Carriers Limited's (NSE:GICL) 26% Share Price Plunge

The Globe International Carriers Limited (NSE:GICL) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term shareholders would now have taken a real hit with the stock declining 6.8% in the last year.

Even after such a large drop in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may still consider Globe International Carriers as a stock to avoid entirely with its 58.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

The recent earnings growth at Globe International Carriers would have to be considered satisfactory if not spectacular. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Globe International Carriers

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Globe International Carriers' earnings, revenue and cash flow.

Is There Enough Growth For Globe International Carriers?

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

If we review the last year of earnings growth, the company posted a worthy increase of 7.1%. Pleasingly, EPS has also lifted 128% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Globe International Carriers' P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Globe International Carriers' P/E?

Even after such a strong price drop, Globe International Carriers' P/E still exceeds the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Globe International Carriers maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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 the recent medium-term conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Globe International Carriers has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're unsure about the strength of Globe International Carriers' 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.