Avanti Feeds Limited's (NSE:AVANTIFEED) Price In Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 17.3x Avanti Feeds Limited (NSE:AVANTIFEED) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Avanti Feeds 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.

See our latest analysis for Avanti Feeds

Where Does Avanti Feeds' P/E Sit Within Its Industry?

It's plausible that Avanti Feeds' high P/E ratio could be a result of tendencies within its own industry. The image below shows that the Food industry as a whole has a P/E ratio similar to the market. So it appears the company's ratio isn't really influenced by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Food industry should be getting restrained. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.

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

Is There Enough Growth For Avanti Feeds?

There's an inherent assumption that a company should outperform the market for P/E ratios like Avanti Feeds' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 61% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 10%. That would be an excellent outcome when the market is expected to decline by 5.0%.

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

What We Can Learn From Avanti Feeds' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Avanti Feeds' analyst forecasts revealed that its superior earnings outlook against a shaky market 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. We still remain cautious about the company's ability to keep swimming against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Avanti Feeds (of which 1 shouldn't be ignored!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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