Zensar Technologies Limited (NSE:ZENSARTECH) Shares Fly 31% But Investors Aren't Buying For Growth

Zensar Technologies Limited (NSE:ZENSARTECH) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 93% in the last year.

In spite of the firm bounce in price, Zensar Technologies' price-to-earnings (or "P/E") ratio of 25.6x might still make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 34x and even P/E's above 66x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Zensar Technologies as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Zensar Technologies

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Zensar Technologies' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 103% last year. The latest three year period has also seen an excellent 120% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 9.2% per year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 22% per year growth forecast for the broader market.

With this information, we can see why Zensar Technologies is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite Zensar Technologies' shares building up a head of steam, its P/E still lags most other companies. 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 Zensar Technologies maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Zensar Technologies that we have uncovered.

You might be able to find a better investment than Zensar Technologies. 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.

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