Investors Appear Satisfied With Godrej Agrovet Limited's (NSE:GODREJAGRO) Prospects As Shares Rocket 27%

Godrej Agrovet Limited (NSE:GODREJAGRO) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 49%.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider Godrej Agrovet as a stock to potentially avoid with its 36.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

There hasn't been much to differentiate Godrej Agrovet's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Godrej Agrovet

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

What Are Growth Metrics Telling Us About The High P/E?

Godrej Agrovet's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. EPS has also lifted 15% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% each year during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 22% 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

The large bounce in Godrej Agrovet's shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of Godrej Agrovet's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Godrej Agrovet that we have uncovered.

If you're unsure about the strength of Godrej Agrovet's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com