With Apcotex Industries Limited (NSE:APCOTEXIND) It Looks Like You'll Get What You Pay For

With a price-to-earnings (or "P/E") ratio of 44.5x Apcotex Industries Limited (NSE:APCOTEXIND) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Apcotex Industries' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Apcotex Industries

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Is There Enough Growth For Apcotex Industries?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 69% over the next year. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Apcotex Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Apcotex Industries' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Apcotex Industries that we have uncovered.

If you're unsure about the strength of Apcotex 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.