Why Investors Shouldn't Be Surprised By Rajshree Sugars and Chemicals Limited's (NSE:RAJSREESUG) 29% Share Price Plunge

The Rajshree Sugars and Chemicals Limited (NSE:RAJSREESUG) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 57%, which is great even in a bull market.

Following the heavy fall in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 31x, you may consider Rajshree Sugars and Chemicals as a highly attractive investment with its 10.7x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Rajshree Sugars and Chemicals as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Rajshree Sugars and Chemicals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Rajshree Sugars and Chemicals will help you shine a light on its historical performance.

Is There Any Growth For Rajshree Sugars and Chemicals?

Rajshree Sugars and Chemicals' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 162% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Rajshree Sugars and Chemicals is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Rajshree Sugars and Chemicals' P/E looks about as weak as its stock price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Rajshree Sugars and Chemicals maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

You need to take note of risks, for example - Rajshree Sugars and Chemicals has 3 warning signs (and 2 which can't be ignored) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.