Alembic Pharmaceuticals Limited’s (NSE:APLLTD) price-to-earnings (or “P/E”) ratio of 18.5x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 16x and even P/E’s below 8x are quite common. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Alembic Pharmaceuticals has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, 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.free report on Alembic Pharmaceuticals will help you uncover what’s on the horizon.
How Is Alembic Pharmaceuticals’ Growth Trending?
In order to justify its P/E ratio, Alembic Pharmaceuticals would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 63% gain to the company’s bottom line. The strong recent performance means it was also able to grow EPS by 175% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 1.5% per annum during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 17% per annum, which paints a poor picture.
With this information, we find it concerning that Alembic Pharmaceuticals is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. There’s a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Key Takeaway
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that Alembic Pharmaceuticals currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 3 warning signs with Alembic Pharmaceuticals, and understanding these should be part of your investment process.
Of course, you might also be able to find a better stock than Alembic Pharmaceuticals. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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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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