Archean Chemical Industries Limited's (NSE:ACI) Shares Not Telling The Full Story

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may consider Archean Chemical Industries Limited (NSE:ACI) as an attractive investment with its 19.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Archean Chemical Industries could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

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

Archean Chemical Industries' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 4.0% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 443% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 34% over the next year. With the market only predicted to deliver 24%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Archean Chemical Industries is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Archean Chemical Industries' P/E?

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.

Our examination of Archean Chemical Industries' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Archean Chemical Industries you should be aware of.

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

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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.