Adani Ports and Special Economic Zone Limited's (NSE:ADANIPORTS) Share Price Matching Investor Opinion

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Adani Ports and Special Economic Zone Limited (NSE:ADANIPORTS) as a stock to potentially avoid with its 38.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, Adani Ports and Special Economic Zone has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Adani Ports and Special Economic Zone

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Adani Ports and Special Economic Zone would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 47%. Pleasingly, EPS has also lifted 79% in aggregate from three years ago, thanks to the last 12 months of growth. 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 31% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 20% per annum, which is noticeably less attractive.

With this information, we can see why Adani Ports and Special Economic Zone is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Adani Ports and Special Economic Zone's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Adani Ports and Special Economic Zone's 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Adani Ports and Special Economic Zone that you should be aware of.

If you're unsure about the strength of Adani Ports and Special Economic Zone's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.