The Market Doesn't Like What It Sees From Reliance Chemotex Industries Limited's (NSE:RELCHEMQ) Earnings Yet As Shares Tumble 26%

The Reliance Chemotex Industries Limited (NSE:RELCHEMQ) share price has fared very poorly over the last month, falling by a substantial 26%. 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.

After such a large drop in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") above 22x, you may consider Reliance Chemotex Industries as a highly attractive investment with its 6.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For example, consider that Reliance Chemotex Industries' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Reliance Chemotex Industries

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

How Is Reliance Chemotex Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Reliance Chemotex Industries' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Reliance Chemotex Industries' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Reliance Chemotex Industries' P/E

Having almost fallen off a cliff, Reliance Chemotex Industries' share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Reliance Chemotex Industries revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Reliance Chemotex Industries (1 is potentially serious!) that you should be aware of.

If you're unsure about the strength of Reliance Chemotex Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.