Indiabulls Ventures Limited’s (NSE:IBVENTUREPP) price-to-earnings (or “P/E”) ratio of 14x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 11x and even P/E’s below 6x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s lofty.
As an illustration, earnings have deteriorated at Indiabulls Ventures over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.free report on Indiabulls Ventures will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
Indiabulls Ventures’ 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 11% decrease to the company’s bottom line. Still, the latest three year period has seen an excellent 336% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been more than adequate for the company.
In contrast to the company, the rest of the market is expected to decline by 2.8% over the next year, which puts the company’s recent medium-term positive growth rates in a good light for now.
With this information, we can see why Indiabulls Ventures is trading at a high P/E compared to the market. Presumably shareholders aren’t keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.
The Key Takeaway
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 Indiabulls Ventures maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling 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. We still remain cautious about the company’s ability to stay its recent course and swim against the current of the broader market turmoil. Although, if the company’s relative performance doesn’t change it will continue to provide strong support to the share price.
Before you settle on your opinion, we’ve discovered 3 warning signs for Indiabulls Ventures that you should be aware of.
You might be able to find a better investment than Indiabulls Ventures. 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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