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Despite an already strong run, 360 OneWam Limited (NSE:360ONE) shares have surged over the past 30 days, gaining 25%. The year-to-date gain is now 115% following the recent surge, which has investors taking notice.

After the significant price increase, 360 One Wam’s price-to-earnings (P/E) ratio of 44.2 might look like a bargain right now compared to the Indian market where about half of the companies have P/E ratios below 32x and even P/E ratios below 18x are quite common. However, it is not advisable to simply take the P/E ratio at face value as there might be an explanation as to why it is so high.

There hasn’t been much of a difference between 360 One Wam’s earnings growth and that of the market recently. One possibility is that the P/E ratio is high because investors believe this modest earnings growth will accelerate. You really should hope so, otherwise you’re paying a pretty high price for no particular reason.

Check out our latest analysis for 360 One Wam

Do you want the full picture of analyst estimates for the company? Then our free The report on 360 One Wam will help you find out what’s on the horizon.

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

To justify its P/E ratio, 360 One Wam would need to deliver impressive above-market growth.

Looking back, last year saw the company achieve an exceptional 21% increase in earnings. In addition, over the last three years, EPS has seen an outstanding overall increase of 110%, helped by short-term performance. Accordingly, shareholders would likely have welcomed these medium-term earnings growth rates.

Looking ahead, the nine analysts covering the company expect earnings to grow 17% per year over the next three years, while the rest of the market is forecast to grow 22% per year, which is much more attractive.

With this in mind, it is alarming that 360 One Wam’s P/E ratio is higher than most other companies. It appears that many of the company’s investors are much more optimistic than analysts indicate and are not willing to offload their shares at any price. There is a good chance that these shareholders are setting themselves up for future disappointment if the P/E ratio falls to a level more in line with the growth prospects.

What can we learn from 360 One Wam’s P/E ratio?

The sharp rise in 360 One Wam shares has pushed the company’s P/E ratio to quite high levels. Normally, we would caution against reading too much into the price-to-earnings ratio when making investment decisions, although it can say a lot about what other market participants think of the company.

We have found that 360 One Wam is currently trading at a significantly higher P/E than expected because its forecast growth is lower than the broader market. If we see weak earnings guidance and slower growth than the market, we suspect the share price could decline, driving the high P/E down. This puts shareholders’ investments at significant risk and potential investors at risk of paying an inflated premium.

Please note, however, 360 One Wam shows 3 warning signals in our investment analysis, and one of them cannot be ignored.

You may find a better investment than 360 One Wam. If you want a selection of possible candidates, check out this free List of interesting companies that trade at a low P/E ratio (but have proven that they can grow their earnings).

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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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