There Is A Reason Avanti Feeds Limited's (NSE:AVANTIFEED) Price Is Undemanding

With a price-to-earnings (or "P/E") ratio of 23.7x Avanti Feeds Limited (NSE:AVANTIFEED) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 56x 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.

Avanti Feeds certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Avanti Feeds

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

Does Growth Match The Low P/E?

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The strong recent performance means it was also able to grow EPS by 73% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.3% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

With this information, we can see why Avanti Feeds is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Avanti Feeds' analyst forecasts revealed that its inferior earnings outlook 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Avanti Feeds, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Avanti Feeds, 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.