Investor Optimism Abounds Vinati Organics Limited (NSE:VINATIORGA) But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Vinati Organics Limited (NSE:VINATIORGA) as a stock to avoid entirely with its 67.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Vinati Organics could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Vinati Organics would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 23% each year as estimated by the twelve analysts watching the company. With the market predicted to deliver 21% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Vinati Organics' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Vinati Organics' P/E

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 Vinati Organics currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Vinati Organics, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Vinati Organics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.