With a price-to-earnings (or "P/E") ratio of 18.7x Advanced Enzyme Technologies Limited (NSE:ADVENZYMES) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 13x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
Advanced Enzyme Technologies certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.
Check out our latest analysis for Advanced Enzyme Technologies
How Is Advanced Enzyme Technologies' Growth Trending?
In order to justify its P/E ratio, Advanced Enzyme Technologies would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 40% 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.
Turning to the outlook, the next year should generate growth of 8.5% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 1.4%, which is noticeably less attractive.
With this information, we can see why Advanced Enzyme Technologies is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Advanced Enzyme Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these 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 1 warning sign for Advanced Enzyme Technologies that you need to be mindful of.
You might be able to find a better investment than Advanced Enzyme Technologies. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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