Adani Ports and Special Economic Zone Limited's (NSE:ADANIPORTS) Share Price Could Signal Some Risk
With a median price-to-earnings (or "P/E") ratio of close to 25x in India, you could be forgiven for feeling indifferent about Adani Ports and Special Economic Zone Limited's (NSE:ADANIPORTS) P/E ratio of 26.4x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
There hasn't been much to differentiate Adani Ports and Special Economic Zone's and the market's earnings growth lately. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.
Check out our latest analysis for Adani Ports and Special Economic Zone
How Is Adani Ports and Special Economic Zone's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Adani Ports and Special Economic Zone's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 15%. The latest three year period has also seen an excellent 119% overall rise in EPS, aided somewhat 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.
Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% each year, which is noticeably more attractive.
With this information, we find it interesting that Adani Ports and Special Economic Zone is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On Adani Ports and Special Economic Zone's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Adani Ports and Special Economic Zone currently trades on a 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 moderate 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 2 warning signs with Adani Ports and Special Economic Zone, and understanding them should be part of your investment process.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.