More Unpleasant Surprises Could Be In Store For Shankar Lal Rampal Dye-Chem Limited's (NSE:SRD) Shares After Tumbling 29%

Unfortunately for some shareholders, the Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) share price has dived 29% in the last thirty days, prolonging recent pain. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, Shankar Lal Rampal Dye-Chem's price-to-earnings (or "P/E") ratio of 41.3x might still 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 31x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Shankar Lal Rampal Dye-Chem as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shankar Lal Rampal Dye-Chem

Although there are no analyst estimates available for Shankar Lal Rampal Dye-Chem, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Shankar Lal Rampal Dye-Chem would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 24% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 26% 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 alarming that Shankar Lal Rampal Dye-Chem's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

There's still some solid strength behind Shankar Lal Rampal Dye-Chem's P/E, if not its share price lately. 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 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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 is a bit unpleasant!) you should know about.

If these risks are making you reconsider your opinion on Shankar Lal Rampal Dye-Chem, 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.