Camlin Fine Sciences Limited's (NSE:CAMLINFINE) 29% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Camlin Fine Sciences Limited (NSE:CAMLINFINE) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 16x, you may consider Camlin Fine Sciences as a stock to avoid entirely with its 45.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Camlin Fine Sciences 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Camlin Fine Sciences

Although there are no analyst estimates available for Camlin Fine Sciences, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Camlin Fine Sciences' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Camlin Fine Sciences' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Camlin Fine Sciences' P/E

Camlin Fine Sciences' P/E is flying high just like its stock has during the last month. 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.

Our examination of Camlin Fine Sciences revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Camlin Fine Sciences (of which 2 are potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Camlin Fine Sciences, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. 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.
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