There's No Escaping Avadh Sugar & Energy Limited's (NSE:AVADHSUGAR) Muted Earnings Despite A 25% Share Price Rise

The Avadh Sugar & Energy Limited (NSE:AVADHSUGAR) share price has done very well over the last month, posting an excellent gain of 25%. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Although its price has surged higher, Avadh Sugar & Energy's price-to-earnings (or "P/E") ratio of 10.5x might still make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 64x 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 so limited.

Earnings have risen firmly for Avadh Sugar & Energy recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Avadh Sugar & Energy

Although there are no analyst estimates available for Avadh Sugar & Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Avadh Sugar & Energy?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Avadh Sugar & Energy's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. The latest three year period has also seen an excellent 65% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Avadh Sugar & Energy'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

Even after such a strong price move, Avadh Sugar & Energy's P/E still trails the rest of the market significantly. 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 Avadh Sugar & Energy maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Avadh Sugar & Energy (including 1 which can't be ignored).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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