Shree Rama Multi-Tech Limited's (NSE:SHREERAMA) Popularity With Investors Is Under Threat From Overpricing

It's not a stretch to say that Shree Rama Multi-Tech Limited's (NSE:SHREERAMA) price-to-earnings (or "P/E") ratio of 26.9x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 27x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Shree Rama Multi-Tech has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Shree Rama Multi-Tech

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 Shree Rama Multi-Tech's earnings, revenue and cash flow.

How Is Shree Rama Multi-Tech's Growth Trending?

In order to justify its P/E ratio, Shree Rama Multi-Tech would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it interesting that Shree Rama Multi-Tech is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shree Rama Multi-Tech currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Shree Rama Multi-Tech is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Shree Rama Multi-Tech. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.