Zodiac Energy Limited (NSE:ZODIAC) Looks Just Right With A 27% Price Jump

Despite an already strong run, Zodiac Energy Limited (NSE:ZODIAC) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 262% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Zodiac Energy may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 76.8x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Zodiac Energy as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Zodiac Energy

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zodiac Energy's earnings, revenue and cash flow.

How Is Zodiac Energy's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 97% last year. Pleasingly, EPS has also lifted 115% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably more attractive on an annualised basis.

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

What We Can Learn From Zodiac Energy's P/E?

The strong share price surge has got Zodiac Energy's P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Zodiac Energy revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Zodiac Energy (1 is significant!) that you need to take into consideration.

You might be able to find a better investment than Zodiac Energy. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.