Little Excitement Around Avanti Feeds Limited's (NSE:AVANTIFEED) Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may consider Avanti Feeds Limited (NSE:AVANTIFEED) as an attractive investment with its 16.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Avanti Feeds as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Avanti Feeds

Want the full picture on analyst estimates for the company? Then our free report on Avanti Feeds will help you uncover what's on the horizon.

Is There Any Growth For Avanti Feeds?

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

If we review the last year of earnings growth, the company posted a terrific increase of 48%. Pleasingly, EPS has also lifted 150% in aggregate from three years ago, 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 bring diminished returns, with earnings decreasing 3.3% per annum as estimated by the sole analyst watching the company. With the market predicted to deliver 20% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Avanti Feeds' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Avanti Feeds' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Avanti Feeds has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.