Some Confidence Is Lacking In Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) As Shares Slide 25%

Shankar Lal Rampal Dye-Chem Limited (NSE:SRD) shares have had a horrible month, losing 25% after a relatively good period beforehand. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, Shankar Lal Rampal Dye-Chem may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 34.3x, 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 as high as it is.

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With earnings growth that's exceedingly strong of late, Shankar Lal Rampal Dye-Chem has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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?

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

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 59% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% 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

Despite the recent share price weakness, Shankar Lal Rampal Dye-Chem's P/E remains higher than most other companies. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Shankar Lal Rampal Dye-Chem (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Shankar Lal Rampal Dye-Chem. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.