There Is A Reason Hindcon Chemicals Limited’s (NSE:HINDCON) Price Is Undemanding

Hindcon Chemicals Limited’s (NSE:HINDCON) price-to-earnings (or “P/E”) ratio of 5.6x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 15x and even P/E’s above 36x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.

We’d have to say that with no tangible growth over the last year, Hindcon Chemicals’ earnings have been unimpressive. It might be that many expect the uninspiring earnings performance to accelerate to the downside, which has repressed the P/E. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Hindcon Chemicals

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NSEI:HINDCON Price Based on Past Earnings August 17th 2020
Although there are no analyst estimates available for Hindcon Chemicals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hindcon Chemicals’ Growth Trending?

In order to justify its P/E ratio, Hindcon Chemicals would need to produce anemic growth that’s substantially trailing the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Whilst it’s an improvement, it wasn’t enough to get the company out of the hole it was in, with earnings down 24% overall from three years ago. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 9.0% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it’s understandable that Hindcon Chemicals’ P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.

The Bottom Line On Hindcon Chemicals’ P/E

Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Hindcon Chemicals revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example – Hindcon Chemicals has 3 warning signs (and 2 which shouldn’t be ignored) we think you should know about.

It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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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