Lumax Industries Limited's (NSE:LUMAXIND) P/E Is Still On The Mark Following 26% Share Price Bounce

Lumax Industries Limited (NSE:LUMAXIND) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Lumax Industries' P/E ratio of 27.6x, since the median price-to-earnings (or "P/E") ratio in India is also close to 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the 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. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Lumax Industries' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. The strong recent performance means it was also able to grow EPS by 101% in total over the last three years. 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 20% per annum during the coming three years according to the three analysts following the company. With the market predicted to deliver 19% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's understandable that Lumax Industries' P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Lumax Industries' P/E

Lumax Industries appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

As we suspected, our examination of Lumax Industries' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Before you take the next step, you should know about the 3 warning signs for Lumax Industries (1 shouldn't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Lumax Industries, 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.