Despite an already strong run, Best Agrolife Limited (NSE:BESTAGRO) shares have been powering on, with a gain of 43% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it’s now virtually flat for the year after the recent bounce.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or “P/E’s”) below 23x, you may consider Best Agrolife as a stock to potentially avoid with its 34.1x 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 lofty.

Recent times have been quite advantageous for Best Agrolife as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

See our latest analysis for Best Agrolife

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NSEI:BESTAGRO Price Based on Past Earnings August 8th 2021

We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Best Agrolife’s earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

There’s an inherent assumption that a company should outperform the market for P/E ratios like Best Agrolife’s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 349% last year. The strong recent performance means it was also able to grow EPS by 108,201% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 25% shows it’s noticeably more attractive on an annualised basis.

In light of this, it’s understandable that Best Agrolife’s P/E sits above the majority of other companies. Presumably shareholders aren’t keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Best Agrolife’s P/E?

Best Agrolife shares have received a push in the right direction, but its P/E is elevated too. 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 Best Agrolife maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it’s hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we’ve spotted 2 warning signs for Best Agrolife you should be aware of.

If you’re unsure about the strength of Best Agrolife’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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