Profits don’t tell the story of Chembond Chemicals Limited (NSE: CHEMBOND)
With a price / earnings (or “P / E”) ratio of 29.6x Chembond Chemicals Limited (NSE: CHEMBOND) may send bearish signals for now, given that almost half of all companies in India have P / E ratios below 20x and even P / E below 10x are not. unusual. However, it is not wise to take the P / E at face value, as there may be an explanation why it is high.
For example, the decline in revenues of Chembond Chemicals lately should be food for thought. It may be that many expect the company to still outperform most other companies in the coming period, which has kept the P / E from collapsing. Otherwise, existing shareholders can be very worried about the sustainability of the share price.
See our latest analysis for Chembond Chemicals
While there are no analyst estimates available for Chembond Chemicals, take a look at this free Data-rich visualization to see how the business compares to profit, revenue, and cash flow.
What do the growth indicators tell us about the high P / E?
There is an inherent assumption that a company would have to outperform the market for P / E ratios like that of Chembond Chemicals to be considered reasonable.
In retrospect, last year saw a frustrating 28% drop in the company’s bottom line. The past three years haven’t looked good either as the company has reduced its EPS by 58% overall. Therefore, it is fair to say that profit growth has recently been undesirable for the company.
Weighing this medium-term earnings trajectory against the larger market’s one-year forecast for a 29% expansion shows that it’s an unpleasant aspect.
With this information we see that Chembond Chemicals is trading at a higher P / E than the market. Apparently, many of the company’s investors are far more bullish than the recent times indicated and are not prepared to give up their shares at any cost. Only the more daring would assume that these prices are sustainable, as the continuation of recent earnings trends is likely to weigh heavily on the futures share price.
The last word
As a general rule, we prefer to limit the use of the price / earnings ratio to establishing what the market thinks about the overall health of a company.
Our review of Chembond Chemicals found that its decline in earnings over the medium term was not affecting its high P / E as much as we would have predicted given the market is set to grow. Right now we are increasingly uncomfortable with the high P / E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent mid-term earnings trends continue, shareholders’ investments will be exposed to significant risk and potential investors may pay an excessive premium.
Remember that there may be other risks. For example, we have identified 3 warning signs for Chembond Chemicals (1 cannot be ignored) that you should be aware of.
You may be able to find a better investment than Chembond Chemicals. If you want a selection of possible candidates, check out this free List of interesting companies that trade with a P / E of less than 20x (but have proven that they can increase their profits).
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