Earnings Tell The Story For Lumax Industries Limited (NSE:LUMAXIND) As Its Stock Soars 25%

Lumax Industries Limited (NSE:LUMAXIND) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 140% in the last year.

Since its price has surged higher, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Lumax Industries as a stock to potentially avoid with its 36x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, Lumax Industries has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Lumax Industries

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Lumax Industries' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. The latest three year period has also seen an excellent 70% 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.

Looking ahead now, EPS is anticipated to climb by 23% per year during the coming three years according to the three analysts following the company. With the market only predicted to deliver 20% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Lumax Industries is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Lumax Industries' P/E?

The large bounce in Lumax Industries' shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Lumax Industries maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. 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 Lumax Industries (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Lumax Industries. 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.