Siddhika Coatings Limited (NSE:SIDDHIKA) Stock's 28% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Siddhika Coatings Limited (NSE:SIDDHIKA) shares have had a horrible month, losing 28% after a relatively good period beforehand. Longer-term, the stock has been solid despite a difficult 30 days, gaining 20% in the last year.

Even after such a large drop in price, Siddhika Coatings' price-to-earnings (or "P/E") ratio of 15x might still 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 34x and even P/E's above 62x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, Siddhika Coatings has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Siddhika Coatings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Siddhika Coatings will help you shine a light on its historical performance.

Is There Any Growth For Siddhika Coatings?

Siddhika Coatings' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. Pleasingly, EPS has also lifted 253% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Siddhika Coatings' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Having almost fallen off a cliff, Siddhika Coatings' share price has pulled its P/E way down as well. 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.

Our examination of Siddhika Coatings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Siddhika Coatings (1 can't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on Siddhika Coatings, 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.