Optimistic Investors Push Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) Shares Up 25% But Growth Is Lacking

Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Shankar Lal Rampal Dye-Chem may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 44x, since almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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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.

See our latest analysis for Shankar Lal Rampal Dye-Chem

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shankar Lal Rampal Dye-Chem's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shankar Lal Rampal Dye-Chem's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 80%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 54% 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 24% 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. 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 Final Word

Shankar Lal Rampal Dye-Chem's P/E is flying high just like its stock has during the last month. 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. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Shankar Lal Rampal Dye-Chem that we have uncovered.

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.