Mazagon Dock Shipbuilders Limited's (NSE:MAZDOCK) 26% Share Price Surge Not Quite Adding Up

Mazagon Dock Shipbuilders Limited (NSE:MAZDOCK) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The annual gain comes to 185% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Mazagon Dock Shipbuilders may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 38.5x, since almost half of all companies in India have P/E ratios under 24x and even P/E's lower than 14x 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.

Mazagon Dock Shipbuilders certainly has been doing a good job lately as it's been growing earnings more 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

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

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

Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 287% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 17% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 25% 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.

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. 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.

Our examination of Mazagon Dock Shipbuilders' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Mazagon Dock Shipbuilders (1 is significant) 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.

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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.