SVP Global Textiles Limited’s (NSE:SVPGLOB) price-to-earnings (or “P/E”) ratio of 6.5x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 20x and even P/E’s above 44x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
With earnings growth that’s exceedingly strong of late, SVP Global Textiles has been doing very well. 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 that doesn’t eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for SVP Global Textiles
Although there are no analyst estimates available for SVP Global Textiles, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is SVP Global Textiles’ Growth Trending?
There’s an inherent assumption that a company should far underperform the market for P/E ratios like SVP Global Textiles’ to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 189%. Pleasingly, EPS has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company’s recent medium-term annualised growth rates.
With this information, we can see why SVP Global Textiles 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
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.
As we suspected, our examination of SVP Global Textiles 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. If recent medium-term earnings trends continue, it’s hard to see the share price rising strongly in the near future under these circumstances.
You need to take note of risks, for example – SVP Global Textiles has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
If you’re unsure about the strength of SVP Global Textiles’ 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.