There wouldn't be many who think Dishman Carbogen Amcis Limited's (NSE:DCAL) price-to-earnings (or "P/E") ratio of 12.1x is worth a mention when the median P/E in India is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Dishman Carbogen Amcis could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
See our latest analysis for Dishman Carbogen Amcis
What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Dishman Carbogen Amcis' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to slump, contracting by 1.3% during the coming year according to the three analysts following the company. With the rest of the market predicted to shrink by 6.7%, it's still an optimal result.
In light of this, the fact Dishman Carbogen Amcis' P/E sits in line with the majority of other companies is unanticipated but certainly not shocking. Even though the company may outperform the market, shrinking earnings are unlikely to lead to a stable P/E long-term. Even just maintaining these prices could be difficult achieve as the weak outlook is already weighing down the shares.
The Key Takeaway
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Dishman Carbogen Amcis' analyst forecasts revealed that its less shaky outlook against the market is impacting its P/E more than we would have predicted. When we see this superior earnings outlook, we assume potential risks are what might be placing pressure on the P/E ratio. Perhaps there is some hesitation about the company's ability to keep resisting the broader market turmoil. It appears some are indeed anticipating earnings instability, because the company's current prospects should normally provide a boost to the share price.
Before you settle on your opinion, we've discovered 1 warning sign for Dishman Carbogen Amcis that you should be aware of.
You might be able to find a better investment than Dishman Carbogen Amcis. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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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About NSEI:DCAL
Dishman Carbogen Amcis
Provides contract research and manufacturing services for the pharmaceutical, healthcare, and bio-technology industries worldwide.
Slightly overvalued with imperfect balance sheet.
