Potential Upside For Arvind Limited (NSE:ARVIND) Not Without Risk

There wouldn't be many who think Arvind Limited's (NSE:ARVIND) price-to-earnings (or "P/E") ratio of 27.2x is worth a mention when the median P/E in India is similar at about 29x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's inferior to most other companies of late, Arvind has been relatively sluggish. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Arvind

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Arvind.

Does Growth Match The P/E?

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, we see that the company managed to grow earnings per share by a handy 5.0% last year. Pleasingly, EPS has also lifted 32% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 35% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 22% per annum growth forecast for the broader market.

In light of this, it's curious that Arvind's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Arvind's P/E

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.

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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for Arvind 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.