Optimistic investors push Choice International Limited (NSE: CHOICEIN) up 28% but growth is lacking

The Limited international choice (NSE: CHOICE IN) the stock price has done very well over the past month, posting an excellent gain of 28%. Longer-term shareholders would be grateful for a recovery in the share price as it is now virtually flat for the year after the recent rebound.

After such a price hike, Choice International may be sending very bearish signals right now with a Price to Earnings (or “P/E”) ratio of 63.4x, as almost half of all companies in India have a P/ E ratios below 22x and even P/E below 11x are not unusual. Nevertheless, we would need to dig a little deeper to determine if there is a rational basis for the very high P/E.

Earnings growth seems to have deserted Choice International lately, which is nothing to brag about. One possibility is that the P/E is high because investors believe benign earnings growth will improve to outperform the market in the near future. If not, existing shareholders might be a bit worried about the viability of the stock price.

Our analysis indicates that CHOICEIN is potentially overvalued!

NSEI: CHOICEIN Price based on prior earnings as of November 3, 2022

We don’t have analyst forecasts, but you can see how recent trends are preparing the company for the future by checking out our free report on Choice International profit, turnover and cash flow.

What do the growth indicators tell us about the high P/E?

In order to justify its P/E ratio, Choice International would need to produce exceptional growth well above the market.

Looking back, last year delivered virtually the same number to the company’s bottom line as the year before. Although EPS was pleasantly up 75% overall from three years ago notwithstanding the last 12 months. Therefore, shareholders would likely have welcomed these medium-term earnings growth rates.

Interestingly, the rest of the market is also expected to grow by 21% over the next year, which is fairly even with the company’s recent mid-term annualized growth rates.

In light of this, it is curious that Choice International’s P/E sits above the majority of other companies. Apparently, many of the company’s investors are more optimistic than indicated lately and aren’t willing to drop their shares just yet. Nonetheless, they could brace themselves for future disappointments if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

The strong surge in share prices also pushed Choice International’s P/E to great heights. We would argue that the power of the P/E ratio is not primarily a valuation tool, but rather to gauge current investor sentiment and future expectations.

Our review of Choice International revealed that its three-year earnings trends do not have as much impact on its high P/E as we would have expected, given that they resemble current market expectations. When we see average earnings with market-like growth, we suspect the stock price may decline, driving down the high PER. If recent medium-term earnings trends continue, it will put shareholders’ investments at risk and potential investors at risk of paying an unnecessary premium.

You should take note of the risks, for example – Choice International has 2 warning signs (and 1 which is significant) that we think you should know about.

If you are uncertain about the soundness of Choice International’s businesswhy not explore our interactive list of stocks with strong trading fundamentals for some other businesses you may have missed.

Valuation is complex, but we help make it simple.

Find out if International choice is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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