Sarveshwar Foods Limited's (NSE:SARVESHWAR) P/E Is Still On The Mark Following 46% Share Price Bounce

Sarveshwar Foods Limited (NSE:SARVESHWAR) shares have continued their recent momentum with a 46% gain in the last month alone. The annual gain comes to 271% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Sarveshwar Foods' price-to-earnings (or "P/E") ratio of 68.6x 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 31x and even P/E's below 17x 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.

Sarveshwar Foods certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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.

What Are Growth Metrics Telling Us About 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.

Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. The strong recent performance means it was also able to grow EPS by 171% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's understandable that Sarveshwar Foods' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Sarveshwar Foods' P/E

The strong share price surge has got Sarveshwar Foods' P/E rushing to great heights as well. 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. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. 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 3 warning signs for Sarveshwar Foods (2 make us uncomfortable!) that you need to be mindful of.

You might be able to find a better investment than Sarveshwar Foods. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.