Sheetal Cool Products Limited (NSE:SCPL) Not Lagging Market On Growth Or Pricing

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 22x, you may consider Sheetal Cool Products Limited (NSE:SCPL) as a stock to potentially avoid with its 28.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been quite advantageous for Sheetal Cool Products 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Our analysis indicates that SCPL is potentially overvalued!

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 Sheetal Cool Products' earnings, revenue and cash flow.

Is There Enough Growth For Sheetal Cool Products?

The only time you'd be truly comfortable seeing a P/E as high as Sheetal Cool Products' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 116% gain to the company's bottom line. The latest three year period has also seen an excellent 270% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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

With this information, we can see why Sheetal Cool Products is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On Sheetal Cool Products' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Sheetal Cool Products revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Sheetal Cool Products (1 shouldn't be ignored!) that you should be aware of.

You might be able to find a better investment than Sheetal Cool Products. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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.