Why Investors Shouldn't Be Surprised By Aarvi Encon Limited's (NSE:AARVI) Low P/E

Aarvi Encon Limited's (NSE:AARVI) price-to-earnings (or "P/E") ratio of 20.3x might 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 65x 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 limited.

For instance, Aarvi Encon's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Aarvi Encon

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How Is Aarvi Encon's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Aarvi Encon's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.3% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Aarvi Encon's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

We'd say 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 Aarvi Encon maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Aarvi Encon has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Aarvi Encon. 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.