With a price-to-earnings (or "P/E") ratio of 17.9x AVG Logistics Limited (NSE:AVG) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for AVG Logistics as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.
View our latest analysis for AVG Logistics
How Is AVG Logistics' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as AVG Logistics' is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 187% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we can see why AVG Logistics is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of AVG Logistics revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 5 warning signs for AVG Logistics (1 is potentially serious!) that you need to be mindful of.
You might be able to find a better investment than AVG Logistics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
About NSEI:AVG
Proven track record with adequate balance sheet.
