SG Mart Limited's (NSE:SGMART) Share Price Matching Investor Opinion

With a price-to-earnings (or "P/E") ratio of 39.9x SG Mart Limited (NSE:SGMART) may be sending very bearish signals at the moment, given that 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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The earnings growth achieved at SG Mart over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for SG Mart

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 SG Mart's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, SG Mart would need to produce outstanding growth well in excess of the market.

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 3,288% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why SG Mart is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From SG Mart's 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.

As we suspected, our examination of SG Mart revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware SG Mart is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on SG Mart, 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.