Tejas Cargo India Limited's (NSE:TEJASCARGO) 27% Share Price Surge Not Quite Adding Up

The Tejas Cargo India Limited (NSE:TEJASCARGO) share price has done very well over the last month, posting an excellent gain of 27%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Tejas Cargo India's price-to-earnings (or "P/E") ratio of 44.9x 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 27x and even P/E's below 15x 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.

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Tejas Cargo India certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Tejas Cargo India

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 Tejas Cargo India's earnings, revenue and cash flow.

How Is Tejas Cargo India's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 38%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 82% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Tejas Cargo India is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Tejas Cargo India's P/E

Shares in Tejas Cargo India 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.

Our examination of Tejas Cargo India revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Tejas Cargo India you should be aware of, and 2 of them are concerning.

If you're unsure about the strength of Tejas Cargo India'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.