Market Participants Recognise DCX Systems Limited's (NSE:DCXINDIA) Earnings Pushing Shares 38% Higher

The DCX Systems Limited (NSE:DCXINDIA) share price has done very well over the last month, posting an excellent gain of 38%. The last 30 days bring the annual gain to a very sharp 60%.

After such a large jump in price, DCX Systems may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 63.2x, since almost half of all companies in India have P/E ratios under 33x and even P/E's lower than 18x 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.

While the market has experienced earnings growth lately, DCX Systems' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for DCX Systems

Want the full picture on analyst estimates for the company? Then our free report on DCX Systems will help you uncover what's on the horizon.

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.8%. Still, the latest three year period has seen an excellent 61% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 47% during the coming year according to the dual analysts following the company. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

With this information, we can see why DCX Systems is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

DCX Systems' P/E is flying high just like its stock has during the last month. 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 DCX Systems 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. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for DCX Systems that you need to be mindful of.

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.

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