Further Upside For Lumax Auto Technologies Limited (NSE:LUMAXTECH) Shares Could Introduce Price Risks After 27% Bounce

Lumax Auto Technologies Limited (NSE:LUMAXTECH) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Lumax Auto Technologies' price-to-earnings (or "P/E") ratio of 30.9x is worth a mention when the median P/E in India is similar at about 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's inferior to most other companies of late, Lumax Auto Technologies has been relatively sluggish. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Lumax Auto Technologies

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What Are Growth Metrics Telling Us About The P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.8% last year. Pleasingly, EPS has also lifted 225% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 70% during the coming year according to the five analysts following the company. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

In light of this, it's curious that Lumax Auto Technologies' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From Lumax Auto Technologies' P/E?

Lumax Auto Technologies 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.

We've established that Lumax Auto Technologies currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

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

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