Investors Appear Satisfied With ZF Commercial Vehicle Control Systems India Limited's (NSE:ZFCVINDIA) Prospects As Shares Rocket 25%

ZF Commercial Vehicle Control Systems India Limited (NSE:ZFCVINDIA) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

Since its price has surged higher, ZF Commercial Vehicle Control Systems India may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 78.4x, since almost half of all companies in India have P/E ratios under 28x and even P/E's lower than 16x are not unusual. 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 ZF Commercial Vehicle Control Systems India as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for ZF Commercial Vehicle Control Systems India

Keen to find out how analysts think ZF Commercial Vehicle Control Systems India's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ZF Commercial Vehicle Control Systems India's Growth Trending?

ZF Commercial Vehicle Control Systems India's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Pleasingly, EPS has also lifted 292% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 23% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 21% per annum, which is noticeably less attractive.

In light of this, it's understandable that ZF Commercial Vehicle Control Systems India'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 ZF Commercial Vehicle Control Systems India's P/E

ZF Commercial Vehicle Control Systems India's P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of ZF Commercial Vehicle Control Systems India's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with ZF Commercial Vehicle Control Systems India (including 1 which doesn't sit too well with us).

Of course, you might also be able to find a better stock than ZF Commercial Vehicle Control Systems India. 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.