Ambani Orgochem Limited's (NSE:AMBANIORGO) 37% Share Price Surge Not Quite Adding Up

Ambani Orgochem Limited (NSE:AMBANIORGO) shares have continued their recent momentum with a 37% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 5.2% isn't as impressive.

After such a large jump in price, Ambani Orgochem may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77x, since almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 18x 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 so lofty.

With earnings growth that's exceedingly strong of late, Ambani Orgochem 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ambani Orgochem

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

How Is Ambani Orgochem's Growth Trending?

In order to justify its P/E ratio, Ambani Orgochem would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 60% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 56% 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 26% shows it's an unpleasant look.

In light of this, it's alarming that Ambani Orgochem's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Ambani Orgochem's P/E?

Shares in Ambani Orgochem have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Ambani Orgochem revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Ambani Orgochem (2 shouldn't be ignored!) that you need to be mindful of.

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

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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.