Why Investors Shouldn't Be Surprised By BASF India Limited's (NSE:BASF) 26% Share Price Surge

BASF India Limited (NSE:BASF) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 235% in the last year.

Following the firm bounce in price, BASF India may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 55x, since almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 18x 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.

BASF India 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BASF India

Want the full picture on analyst estimates for the company? Then our free report on BASF India will help you uncover what's on the horizon.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 111% gain to the company's bottom line. Still, incredibly EPS has fallen 14% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 34% over the next year. That's shaping up to be materially higher than the 26% growth forecast for the broader market.

In light of this, it's understandable that BASF India's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On BASF India's P/E

Shares in BASF India have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of BASF India's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with BASF India.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.