Godrej Agrovet Limited's (NSE:GODREJAGRO) P/E Still Appears To Be Reasonable

With a price-to-earnings (or "P/E") ratio of 35.4x Godrej Agrovet Limited (NSE:GODREJAGRO) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 24x and even P/E's lower than 14x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Godrej Agrovet certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Godrej Agrovet

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

Is There Enough Growth For Godrej Agrovet?

There's an inherent assumption that a company should outperform the market for P/E ratios like Godrej Agrovet's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. EPS has also lifted 23% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the seven analysts watching the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Godrej Agrovet is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 Godrej Agrovet's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Godrej Agrovet has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Godrej Agrovet. 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.