IRM Energy Limited (NSE:IRMENERGY) Soars 26% But It's A Story Of Risk Vs Reward

Those holding IRM Energy Limited (NSE:IRMENERGY) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think IRM Energy's price-to-earnings (or "P/E") ratio of 25.7x is worth a mention when the median P/E in India is similar at about 25x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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IRM Energy hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for IRM Energy

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

How Is IRM Energy's Growth Trending?

In order to justify its P/E ratio, IRM Energy would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. As a result, earnings from three years ago have also fallen 72% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 214% during the coming year according to the only analyst following the company. That's shaping up to be materially higher than the 25% growth forecast for the broader market.

With this information, we find it interesting that IRM Energy is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From IRM Energy's P/E?

Its shares have lifted substantially and now IRM Energy's P/E is also back up to the market median. 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 IRM Energy currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with IRM Energy , and understanding these should be part of your investment process.

If you're unsure about the strength of IRM Energy'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.