After Leaping 81% Hindustan Zinc Limited (NSE:HINDZINC) Shares Are Not Flying Under The Radar

Despite an already strong run, Hindustan Zinc Limited (NSE:HINDZINC) shares have been powering on, with a gain of 81% in the last thirty days. The last month tops off a massive increase of 143% in the last year.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Hindustan Zinc as a stock to potentially avoid with its 40.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Hindustan Zinc hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Hindustan Zinc

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Does Growth Match The High P/E?

Hindustan Zinc's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 2.7% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 32% during the coming year according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 25%, which is noticeably less attractive.

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

The Final Word

Hindustan Zinc's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Hindustan Zinc maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

You always need to take note of risks, for example - Hindustan Zinc has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Hindustan Zinc's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.