Adani Transmission Limited's (NSE:ADANITRANS) Share Price Matching Investor Opinion

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 12x, you may consider Adani Transmission Limited (NSE:ADANITRANS) as a stock to avoid entirely with its 78.1x P/E ratio. 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.

With earnings growth that's superior to most other companies of late, Adani Transmission has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Adani Transmission

Does Adani Transmission Have A Relatively High Or Low P/E For Its Industry?

It's plausible that Adani Transmission's particularly high P/E ratio could be a result of tendencies within its own industry. It turns out the Electric Utilities industry in general has a P/E ratio lower than the market, as the graphic below shows. So unfortunately this doesn't provide much to explain the company's ratio at all right now. In the context of the Electric Utilities industry's current setting, most of its constituents' P/E's would be expected to be toned down. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

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

How Is Adani Transmission's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Adani Transmission'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 41% last year. 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.

Turning to the outlook, the next three years should generate growth of 52% per annum as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

With this information, we can see why Adani Transmission 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

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Adani Transmission maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Adani Transmission (at least 1 which can't be ignored), and understanding them should be part of your investment process.

You might be able to find a better investment than Adani Transmission. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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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