Market Participants Recognise SJVN Limited's (NSE:SJVN) Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 24x, you may consider SJVN Limited (NSE:SJVN) as a stock to potentially avoid with its 35.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times haven't been advantageous for SJVN as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very 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, SJVN 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 17%. Still, incredibly EPS has fallen 37% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 29% over the next year. Meanwhile, the rest of the market is forecast to only expand by 25%, which is noticeably less attractive.

With this information, we can see why SJVN 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 Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SJVN maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - SJVN has 2 warning signs (and 1 which is significant) we think you should know about.

If you're unsure about the strength of SJVN'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.