Why Investors Shouldn't Be Surprised By Bharat Forge Limited's (NSE:BHARATFORG) 28% Share Price Surge

Bharat Forge Limited (NSE:BHARATFORG) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 101% in the last year.

Following the firm bounce in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider Bharat Forge as a stock to avoid entirely with its 78.7x P/E ratio. 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.

Recent times have been advantageous for Bharat Forge as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Bharat Forge

Want the full picture on analyst estimates for the company? Then our free report on Bharat Forge will help you uncover what's on the horizon.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 80% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 37% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% each year, which is noticeably less attractive.

In light of this, it's understandable that Bharat Forge's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Bharat Forge's P/E

The strong share price surge has got Bharat Forge's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Bharat Forge's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Bharat Forge, and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Bharat Forge. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.