Getting In Cheap On Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) Is Unlikely

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) as a stock to avoid entirely with its 51.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Shankar Lal Rampal Dye-Chem's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shankar Lal Rampal Dye-Chem

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shankar Lal Rampal Dye-Chem will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Shankar Lal Rampal Dye-Chem's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 9.3% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 9.8% overall. 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 26% shows it's an unpleasant look.

In light of this, it's alarming that Shankar Lal Rampal Dye-Chem's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shankar Lal Rampal Dye-Chem currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shankar Lal Rampal Dye-Chem (of which 1 can't be ignored!) you should know about.

You might be able to find a better investment than Shankar Lal Rampal Dye-Chem. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.