Market Cool On Arvind Limited's (NSE:ARVIND) Earnings

With a price-to-earnings (or "P/E") ratio of 20.5x Arvind Limited (NSE:ARVIND) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Arvind's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Arvind

Keen to find out how analysts think Arvind's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Arvind?

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

Retrospectively, the last year delivered a frustrating 2.2% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 24% each year as estimated by the six analysts watching the company. With the market only predicted to deliver 20% each year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Arvind is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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 Arvind currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Arvind that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.