What You Can Learn From Sarveshwar Foods Limited's (NSE:SARVESHWAR) P/EAfter Its 33% Share Price Crash

The Sarveshwar Foods Limited (NSE:SARVESHWAR) share price has softened a substantial 33% over the previous 30 days, handing back much of the gains the stock has made lately. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 332% in the last year.

Although its price has dipped substantially, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may still consider Sarveshwar Foods as a stock to avoid entirely with its 63.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Sarveshwar Foods as its earnings have been rising very briskly. 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.

See 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.

How Is Sarveshwar Foods' Growth Trending?

In order to justify its P/E ratio, Sarveshwar Foods would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 78% gain to the company's bottom line. Pleasingly, EPS has also lifted 171% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Sarveshwar Foods' P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

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

Even after such a strong price drop, Sarveshwar Foods' P/E still exceeds the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a 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.

You need to take note of risks, for example - Sarveshwar Foods has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.