Arvind Limited (NSE:ARVIND) Might Not Be As Mispriced As It Looks

There wouldn't be many who think Arvind Limited's (NSE:ARVIND) price-to-earnings (or "P/E") ratio of 34.2x is worth a mention when the median P/E in India is similar at about 33x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Arvind hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Arvind

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Is There Some Growth For Arvind?

In order to justify its P/E ratio, Arvind would need to produce growth that's similar to 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 15%. Even so, admirably EPS has lifted 338% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 38% per annum over the next three years. With the market only predicted to deliver 20% per annum, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Arvind is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Arvind's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Arvind's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Arvind that you should be aware of.

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