Clariant Chemicals (India) Limited's (NSE:CLNINDIA) Popularity With Investors Under Threat

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 14x, you may consider Clariant Chemicals (India) Limited (NSE:CLNINDIA) as a stock to avoid entirely with its 50.4x 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 so lofty.

With earnings growth that's exceedingly strong of late, Clariant Chemicals (India) has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Clariant Chemicals (India)

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 Clariant Chemicals (India)'s earnings, revenue and cash flow.

Is There Enough Growth For Clariant Chemicals (India)?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Clariant Chemicals (India)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 60% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 24% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 3.6% shows it's an unpleasant look.

With this information, we find it concerning that Clariant Chemicals (India) is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Clariant Chemicals (India) revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Clariant Chemicals (India) (1 is a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Clariant Chemicals (India), 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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