Why Investors Shouldn't Be Surprised By Bharat Dynamics Limited's (NSE:BDL) 36% Share Price Surge

Bharat Dynamics Limited (NSE:BDL) shares have continued their recent momentum with a 36% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 92% in the last year.

Since its price has surged higher, Bharat Dynamics may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.7x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 16x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Bharat Dynamics' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Bharat Dynamics

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

How Is Bharat Dynamics' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 37% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 32% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

With this information, we can see why Bharat Dynamics 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.

The Bottom Line On Bharat Dynamics' P/E

The strong share price surge has got Bharat Dynamics' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Bharat Dynamics 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Bharat Dynamics that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.