Earnings Not Telling The Story For Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) After Shares Rise 25%

Despite an already strong run, Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 189% in the last year.

Since its price has surged higher, Mazagon Dock Shipbuilders may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55.9x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x 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.

With earnings growth that's superior to most other companies of late, Mazagon Dock Shipbuilders has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Mazagon Dock Shipbuilders

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

Mazagon Dock Shipbuilders' 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.

If we review the last year of earnings growth, the company posted a terrific increase of 73%. The strong recent performance means it was also able to grow EPS by 277% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 24% as estimated by the dual analysts watching the company. That's shaping up to be similar to the 26% growth forecast for the broader market.

With this information, we find it interesting that Mazagon Dock Shipbuilders is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Mazagon Dock Shipbuilders' P/E?

Mazagon Dock Shipbuilders' P/E is flying high just like its stock has during the last month. 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.

Our examination of Mazagon Dock Shipbuilders' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Mazagon Dock Shipbuilders (2 are significant!) that you should be aware of before investing here.

If you're unsure about the strength of Mazagon Dock Shipbuilders' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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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