Risks Still Elevated At These Prices As SKP Bearing Industries Limited (NSE:SKP) Shares Dive 26%

SKP Bearing Industries Limited (NSE:SKP) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 36% share price drop.

Even after such a large drop in price, SKP Bearing Industries may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 51.5x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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SKP Bearing Industries 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.

See our latest analysis for SKP Bearing Industries

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 SKP Bearing Industries' earnings, revenue and cash flow.

Is There Enough Growth For SKP Bearing Industries?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Still, incredibly EPS has fallen 67% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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

In light of this, it's alarming that SKP Bearing Industries' P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From SKP Bearing Industries' P/E?

Even after such a strong price drop, SKP Bearing Industries' P/E still exceeds the rest of the market significantly. 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 SKP Bearing Industries currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 5 warning signs for SKP Bearing Industries (3 can't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on SKP Bearing Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.