Despite an already strong run, Advanced Enzyme Technologies Limited (NSE:ADVENZYMES) shares have been powering on, with a gain of 31% in the last thirty days. The last 30 days bring the annual gain to a very sharp 78%.
After such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 15x, you may consider Advanced Enzyme Technologies as a stock to avoid entirely with its 25.1x P/E ratio. 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.
Recent times have been pleasing for Advanced Enzyme Technologies as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.free report on Advanced Enzyme Technologies.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Advanced Enzyme Technologies' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. The latest three year period has also seen an excellent 63% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 19% as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 12%, which is noticeably less attractive.
In light of this, it's understandable that Advanced Enzyme Technologies' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Advanced Enzyme Technologies' P/E
Advanced Enzyme Technologies' 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.
As we suspected, our examination of Advanced Enzyme Technologies' 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 Advanced Enzyme Technologies that we have uncovered.
Of course, you might also be able to find a better stock than Advanced Enzyme Technologies. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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