Vaidya Sane Ayurved Laboratories Limited (NSE:MADHAVBAUG) Stocks Shoot Up 27% But Its P/E Still Looks Reasonable

Those holding Vaidya Sane Ayurved Laboratories Limited (NSE:MADHAVBAUG) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, Vaidya Sane Ayurved Laboratories may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 56.7x, since almost half of all companies in India have P/E ratios under 20x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Vaidya Sane Ayurved Laboratories certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

See our latest analysis for Vaidya Sane Ayurved Laboratories

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 Vaidya Sane Ayurved Laboratories' earnings, revenue and cash flow.

Is There Enough Growth For Vaidya Sane Ayurved Laboratories?

In order to justify its P/E ratio, Vaidya Sane Ayurved Laboratories would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 261% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 364% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 21% 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 Vaidya Sane Ayurved Laboratories' 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.

What We Can Learn From Vaidya Sane Ayurved Laboratories' P/E?

Vaidya Sane Ayurved Laboratories' P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Vaidya Sane Ayurved Laboratories 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Vaidya Sane Ayurved Laboratories (1 is potentially serious!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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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.