Precision Camshafts Limited (NSE:PRECAM) shareholders would be happy to hear that the share price has had a great month, gaining 33% and recovering from previous weakness. While new buyers may be laughing, long-term holders may not be so pleased, as the recent gain only takes the stock back to where it started a year ago.
Given the significant price increase and the fact that around half of Indian companies have a price-to-earnings (P/E) ratio of less than 33, you may want to consider Precision Camshafts with its P/E ratio of 47 as a stock to avoid. However, the P/E ratio might be high for a reason and further research is needed to determine if it is justified.
Precision Camshafts’ recent earnings growth has to be considered satisfactory, if not spectacular. One possibility is that the P/E ratio is high because investors believe this good earnings growth will be enough to outperform the broader market in the near future. You really should hope so, otherwise you’re paying a pretty high price for no particular reason.
Check out our latest analysis for precision camshafts
Although there are no analyst estimates for Precision Camshafts, take a look at these free Data-rich visualization to see how the company is performing in terms of profit, revenue and cash flow.
What is the growth trend for precision camshafts?
There is a fundamental assumption that a company must outperform the market for P/E ratios like Precision Camshafts’ to be considered reasonable.
First, if we look back, we can see that the company grew earnings per share by a respectable 3.8% last year. Encouragingly, overall earnings per share are up 546% year-on-year, thanks in part to growth over the last 12 months. So, first of all, we can see that the company has done a great job of growing its earnings during that time.
Compared to the market, which is only forecast to grow by 26 percent over the next twelve months, the company’s momentum is stronger based on the latest medium-term annualized earnings figures.
With this information, we can see why Precision Camshafts is trading at such a high P/E compared to the market. Presumably shareholders aren’t interested in dumping something they believe will continue to outmaneuver the stock market.
What can we learn from Precision Camshafts’ P/E ratio?
Precision Camshafts shares have received a boost in the right direction, but its P/E ratio is also elevated. Generally, we prefer to use the price-to-earnings ratio only to determine what the market thinks about the overall health of a company.
We have noted that Precision Camshafts maintains its high P/E ratio as its recent growth over the past three years has been, as expected, higher than the broader market’s forecast. Currently, shareholders are comfortable with the P/E ratio as they are fairly confident that earnings are not at risk. Unless recent medium-term conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we have 3 warning signals for precision camshafts You should know about this.
If this Risks make you rethink your opinion on precision camshaftsexplore our interactive list of high-quality stocks to get a sense of what else is out there.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
