Earnings Not Telling The Story For Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) After Shares Rise 28%

Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The annual gain comes to 137% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Mazagon Dock Shipbuilders may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.5x, since almost half of all companies in India have P/E ratios under 32x 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 as high as it is.

Recent times have been advantageous for Mazagon Dock Shipbuilders as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. 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

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

Is There Enough Growth For Mazagon Dock Shipbuilders?

The only time you'd be truly comfortable seeing a P/E as high as Mazagon Dock Shipbuilders' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 94% last year. Pleasingly, EPS has also lifted 304% 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.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader market.

In light of this, it's alarming that Mazagon Dock Shipbuilders' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in Mazagon Dock Shipbuilders' shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Mazagon Dock Shipbuilders currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Mazagon Dock Shipbuilders that you should be aware of.

If these risks are making you reconsider your opinion on Mazagon Dock Shipbuilders, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.