Lumax Auto Technologies Limited's (NSE:LUMAXTECH) Price Is Right But Growth Is Lacking After Shares Rocket 25%

Lumax Auto Technologies Limited (NSE:LUMAXTECH) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 58%.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 34x, you may still consider Lumax Auto Technologies as an attractive investment with its 26.6x 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 limited.

With earnings growth that's superior to most other companies of late, Lumax Auto Technologies has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Lumax Auto Technologies

Keen to find out how analysts think Lumax Auto Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Lumax Auto Technologies?

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

If we review the last year of earnings growth, the company posted a terrific increase of 70%. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 17% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 20% per year, which is noticeably more attractive.

In light of this, it's understandable that Lumax Auto Technologies' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Lumax Auto Technologies' P/E

The latest share price surge wasn't enough to lift Lumax Auto Technologies' P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Lumax Auto Technologies maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Lumax Auto Technologies you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.