Potential Upside For Vardhman Textiles Limited (NSE:VTL) Not Without Risk

With a price-to-earnings (or "P/E") ratio of 20.6x Vardhman Textiles Limited (NSE:VTL) 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 58x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Vardhman Textiles hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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 Vardhman Textiles

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

How Is Vardhman Textiles' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 53% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 36% per annum as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

In light of this, it's peculiar that Vardhman Textiles' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Vardhman Textiles' 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 Vardhman Textiles' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near 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 significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

If these risks are making you reconsider your opinion on Vardhman Textiles, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.