Risks Still Elevated At These Prices As Gabriel India Limited (NSE:GABRIEL) Shares Dive 25%

Gabriel India Limited (NSE:GABRIEL) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 90%, which is great even in a bull market.

In spite of the heavy fall in price, Gabriel India may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.2x, 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Gabriel India certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Gabriel India

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Gabriel India's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The latest three year period has also seen an excellent 109% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

In light of this, it's alarming that Gabriel India's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

A significant share price dive has done very little to deflate Gabriel India's very lofty P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Gabriel India currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Gabriel India (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.