Sarveshwar Foods Limited's (NSE:SARVESHWAR) 30% Jump Shows Its Popularity With Investors

Sarveshwar Foods Limited (NSE:SARVESHWAR) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 98%.

Since its price has surged higher, Sarveshwar Foods' price-to-earnings (or "P/E") ratio of 50.9x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 29x and even P/E's below 16x 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 lofty.

With earnings growth that's exceedingly strong of late, Sarveshwar Foods has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sarveshwar Foods

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sarveshwar Foods' earnings, revenue and cash flow.

Does Growth Match The High P/E?

Sarveshwar Foods' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 194% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

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

What We Can Learn From Sarveshwar Foods' P/E?

Sarveshwar Foods' P/E is flying high just like its stock has during the last month. 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.

We've established that Sarveshwar Foods maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Sarveshwar Foods (2 are a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Sarveshwar Foods' 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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