The Market Lifts Nova Agritech Limited (NSE:NOVAAGRI) Shares 36% But It Can Do More

Despite an already strong run, Nova Agritech Limited (NSE:NOVAAGRI) shares have been powering on, with a gain of 36% in the last thirty days. 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.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may still consider Nova Agritech as an attractive investment with its 29.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at Nova Agritech over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Nova Agritech

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 Nova Agritech's earnings, revenue and cash flow.

How Is Nova Agritech's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Nova Agritech's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. The latest three year period has also seen an excellent 205% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Nova Agritech is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Nova Agritech's P/E?

Despite Nova Agritech's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Nova Agritech currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Nova Agritech that you need to take into consideration.

Of course, you might also be able to find a better stock than Nova Agritech. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com