Arvind SmartSpaces Limited's (NSE:ARVSMART) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 30.6x Arvind SmartSpaces Limited (NSE:ARVSMART) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Arvind SmartSpaces certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Arvind SmartSpaces

Keen to find out how analysts think Arvind SmartSpaces' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Arvind SmartSpaces' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 202%. The latest three year period has also seen an excellent 392% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 6.5% during the coming year according to the three analysts following the company. With the market predicted to deliver 25% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Arvind SmartSpaces is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 Arvind SmartSpaces currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very 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 Arvind SmartSpaces, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Arvind SmartSpaces. 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.