What Zen Technologies Limited's (NSE:ZENTEC) 26% Share Price Gain Is Not Telling You

Despite an already strong run, Zen Technologies Limited (NSE:ZENTEC) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 96%.

After such a large jump in price, Zen Technologies' price-to-earnings (or "P/E") ratio of 60.7x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Zen Technologies has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Zen Technologies

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

Is There Enough Growth For Zen Technologies?

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

Retrospectively, the last year delivered an exceptional 108% gain to the company's bottom line. Pleasingly, EPS has also lifted 12,332% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 23% during the coming year according to the dual analysts following the company. That's shaping up to be similar to the 24% growth forecast for the broader market.

In light of this, it's curious that Zen Technologies' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shares in Zen Technologies have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Zen Technologies currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Zen Technologies you should know about.

Of course, you might also be able to find a better stock than Zen Technologies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.