Some Shareholders Feeling Restless Over Vintage Coffee and Beverages Limited's (NSE:VINCOFE) P/E Ratio

Vintage Coffee and Beverages Limited's (NSE:VINCOFE) price-to-earnings (or "P/E") ratio of 78x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 32x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Vintage Coffee and Beverages certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Vintage Coffee and Beverages

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Vintage Coffee and Beverages will help you shine a light on its historical performance.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Vintage Coffee and Beverages' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 127% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Vintage Coffee and Beverages' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Vintage Coffee and Beverages' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Vintage Coffee and Beverages currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Vintage Coffee and Beverages is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Vintage Coffee and Beverages. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.