Arvee Laboratories (India) Ltd.'s (NSE:ARVEE) Popularity With Investors Under Threat As Stock Sinks 28%

Arvee Laboratories (India) Ltd. (NSE:ARVEE) shares have had a horrible month, losing 28% after a relatively good period beforehand. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, Arvee Laboratories (India) may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 78.5x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 18x 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 so lofty.

Recent times have been quite advantageous for Arvee Laboratories (India) 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 Arvee Laboratories (India)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Arvee Laboratories (India) will help you shine a light on its historical performance.

How Is Arvee Laboratories (India)'s Growth Trending?

In order to justify its P/E ratio, Arvee Laboratories (India) would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 41% gain to the company's bottom line. Still, incredibly EPS has fallen 12% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

With this information, we find it concerning that Arvee Laboratories (India) is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Arvee Laboratories (India)'s shares may have retreated, but its P/E is still flying high. 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.

Our examination of Arvee Laboratories (India) revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Arvee Laboratories (India) (at least 3 which are potentially serious), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.